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NATO: A BUSINESS HISTORY
Volume III of three
by Robert R. Foxcurran
1986 revision

NATO: A BUSINESS HISTORY
Volume El of three
by Robert R. Foxcurran
1986 revision

This information is considered to be Competitive Sensitive by The Boeing Company. It
has not been released for broader dissemination to industry. At this juncture it is
available outside of Boeing for U.S. Government and NATO staff personnel only.

Disk # 196/Cover Sheet/R4/3

CHAPTER 10

MODE #5 - TRANSATLANTIC JOINT DEVELOPMENT

This Mode of industrial collaboration Is one that has encountered greater
difficulty than any other Mode. Here we cover three failures; the MBT-70, AVS
fighter. Mallard-tactical communication system; one partial abort, the NATO
PHM; and two successes, the NATO Seasparrow and the CFM-56. These latter two
projects suggests some guidelines as to where and how this Mode can work, and
is also highly important for Mode #8 of industrial collaboration (the Family
of Weapons concept) .

This Mode has faced serious problems in several areas. Chief among these are:

(1) The greater difficulty of coordinating the input of the users, and main-
taining their support for a given requirement, especially on the U.S
end .

(2) Balancing the overwhelming proportionate U.S. governmental and industrial
share of such programs, with the preference of the larger European
nations for collaboration on an equity basis.

(3) Establishing a politically acceptable yet effective chain of command
within both the Industry and government teams.

(4) U.S. export restrictions .

Chapter 10
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A. TWO SPECIFIC AREAS WHERE U.S. PARTICIPATION IN JOINT DEVELOPMENT HAS WORKED

Before going into the six projects, two related areas are treated briefly:
lower level transatlantic cooperation in R & D and the U.S. -Canadian relation-
ship.

1. Lower-level Transatlantic Cooperative R & D Projects

In contrast to the examples of transatlantic co-development of major systems
there are a plethora of recent examples of lower-level transatlantic coopera-
tive R & 0 projects, amongst which there has been a higher rate of positive
results. Amongst these are two principal categories. First, there are those
covering a broad range of basic research and exploratory development which are
too numerous to enumerate.. Second, there are a small number of subsystems
which have successfully completed engineering development. Implementation is
either through the work being divided up between participants with each par-
ticipating country funding its respective effort or by having the two or more
participating nations collectively fund the work which is carried out unilat-
erally in one nation.

a. Basic Research and Exploratory Development

An example of the U.S. cooperating in exploratory development was the U.S.
Army-UK program on fuel cells. A fuel cell generates direct electrical cur-
rent through the cold chemical reaction between oxygen and hydrogen. The
objective of the work was to form a basis for developing efficient, advanced.

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A-l

low-cost electrical power sources. The project took place between i960 and
1974 costing a bit over one million dollars and was one from which both
parties benefited economically as well as technologically.^

The U.S. Navy set up a shallow-water acoustic basic research program in June,

1972, with the FRG and Netherlands. The program is concerned with gathering

basic hydroacoustic data, exploring environmental acoustics of the Baltic Sea,

and testing sound propagation in selected areas of the western Baltic Sea.

The program's objective is to expand the shallow-water research data bank of

the participants by capitalizing on each others research.

Another cooperative basic research project involved the U.S. Army and the FRG
in studying the effects of transient radiation effects on electronics as
relating to the Leopard tank. The work was carried out between 1971 and 1975
solely in the U.S.3

There are also a number of NATO associated coordinating group activities and
technical centers, that contribute to technical information exchange and the
initiation of cooperative efforts. These include, in addition to CNAD and its
Service Armaments Groups and the Defense Research Group, the NATO Science Com-
mittee, and the Advisory Group for Aerospace Research and Development (AGARD).
These are examples of NATO coordinating bodies which continuously provide a

working mechanism for cooperation. The SHAPE Technical Center (STC) and the
SACLANT ASW Research Center, are both jointly funded and staffed research
activities, that support NATO military organizations in scientific and

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A-2

technical matters. Then there is the Azores fixed acoustics range facility,

which is almost NATO-wide, being commonly funded by the U.S., UK, FRG, Nether-

lands, France, Italy, Canada and Portugal.

b. Engineering Development

Most of the cooperatively developed subsystems involving the U.S. that have
successfully completed engineering development have involved Canada as the
other partner. Here, however, we are concerned with the U.S. -European rela-
tionship not the unique U.S. -Canadian one, which will be briefly treated,
shortly.

Even though there has been historically a fairly high attrition rate among the
transatlantic co-development programs there have been several that have com-
pleted engineering development.6 One of these is the U.S.A.F. and the FRG
cooperative (advanced and engineering) development of a side-looking airborne
radar system. The initial program took place between 1968 and 1974 and cost
some $24 million. The radar provides all-weather reconnaisance in three-
dimensional picture-like presentation with greater aerial coverage.7

c. Two Funding Methods

The first of the two arrangements for funding and distributing work was used
in the case of the U.S. - UK cooperation in fuel cells development and the
U.S. -FRG -Netherlands shallow-water acoustic research program. For the fuel
cells program the work was divided up between the U.S. and UK, with each

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A-3

funding its own effort. The U.S. share of the costs came to 63% of the total.
The shallow-water acoustic research program followed a similar arrangement.

In the case of both the side-looking airborne radar and the transient radia-
tion effects on Leopard tank electronics programs all work was performed in
the U.S. For the former program the cost was shared 50 - 50 since both
nations had a requirement, but with the latter program the FRG provided for
the total funding.

In both cases the FRG was basically just buying technology. This arrangement
though does not necessarily depend on lack of capability on the part of one
partner to perform its share of the work as is exemplified in the development
of the Javelot forward air defense missile system project. The U.S. agreed to
pay 50% of the development cost while all development work was in France. The
project began in April 1971 with an estimated completion date of April, 1976,

and amounted to several million dollars.

2. The U.S. - Canadian Production Sharing Agreement (1963)

A special relationship exists between the U.S. and Canada that is unique among
NATO relationships and provides for close cooperation in military research and
development, as well as production. In 1963, the United States - Canadian
Development Sharing Program was established as a natural followup to the U.S.
-Canada Production Sharing Agreement of 1941, and the 1950 Joint Statement of
Economic Cooperation. 9 More immediately, this Development-Sharing Program
stems from a 1958 decision of the Canadian Government that it was no longer

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practical to undertake unilateral development of major military systems for
the meeting of Canadian military requirements. Since this meant that subse-
quent procurement of major military systems would be from off-shore sources,
primarily the U.S. , it was necessary to establish a framework that would allow
for the maintenance of Canadian industrial and technical capability which
could provide for offsetting sales. This led to the expansion of the U.S.-
Canada production sharing to include development sharing as well.

Under the Development Sharing Program the U.S. pays for at least 25% of the
cost of individual Canadian projects, but for the most part, cost sharing
comes to around a 50 - 50 split. All work on these projects is done in
Canada.

The stated objectives of the program are:

(1) To assist in maintaining the Defense Production Sharing Program at a high
level by making it possible for Canadian firms to perform research and
development work undertaken to meet the requirements of the U.S. Armed
Forces.

(2) To better utilize the industrial, scientific and technical resources of
the United States and Canada in the interest of mutual defense.

(3) To make possible the standardization and interchangeability of a larger
amount of the equipment necessary for the defense of the United States
and Canada.

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1 Comptroller General of the United States, Benefits and Drawbacks of U.S.
Participation in Military Cooperative Research and Development Programs

with Allied Countries, 1974, pp. 11 and 37.

2 Ibid., p. 13

3 Ibid., p. 37

4 Ibid., p. 39

5 The Azores facility is for conducting fixed underwater voice communica-
tions experiments.

The Navy wanted to develop data for such a communication system, using
the most adverse conditions as a basis and thereby establishing the
parameter within the system would have to operate. The Azores area had
the environmental and geographical conditions most desired. As a result
the Navy has gained access to an area that the United States might other
wise have had to rent, or worse, have been denied access to.

6 Several such projects involving U.S. Mutual Weapons Development Program

(MWDP) funding are mentioned elsewhere in the paper.

7 Comptroller General, op. cit. , pp 10-11

8 Ibid., p. 19.

9 The 1950 Joint Statement of Economic Cooperation was closely related to
the Canadian decision of the same year to surplus its older WWII British
equipment and to re-equip its land forces with American equipment
(covered in Chapter 5)

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B. The U.S.-FRG MAIN BATTLE TANK FOR THE 1970's (MBT - 70)

In October 1960, one of the NATO working groups emanating from the U.S. joint
development initiatives, called the Twenty Projects, was convened on battle
tanks. The U.S. government felt strongly at the time that transatlantic joint
design and development projects were a natural and necessary expansion on the
recently launched joint production programs. As we will shortly see however,
where joint development was to be successful during the 1960's would be almost
exclusively on an intra-European basis, not a transatlantic one. This was for
a number of reasons; including: a shift in U.S. priorities because of the
gold flow crisis and war in S.E.A.; and the need for Europe's 3 medium powers
to collaborate in projects as coequals.

It quickly became clear to the NATO working group that any joint tank develop-
ment effort would have to be oriented towards a production horizon of no
sooner than ten years, since all of the other three major NATO countries—
France, the FRG, and the UK— were all in the midst of their own tank develop-
ment programs. The French and German projects were still in principle one
joint project launched back in 1957, but one destined to result in the German
Leopard I and the French AMX-30 (see Chapter 8).

Nevertheless, these talks eventually bore fruit in April 1962 in the form of a
joint components agreement between the U.S. and the FRG, within the framework
on the U.S. side of the Mutual Weapons Development Program (MWOP). Through
the program, the components were aimed at providing a tank whose mutually
agreed-on characteristics were close to those of an as yet unbudgeted U.S.

Chapter 10
B-l

successor to the M-60. Costs were to be shared and the program was to be
administered by 2 national representatives meeting regularly as a Program
Management Board.

Independently of the US-FRG joint development agreement reached at the level
of the two army staffs, at the ministerial level a joint tank development
project came to be seen as desirable to both parties. Secretary McNamara had
pressed German Defense Minister Strauss in April 1961 on the subject of joint
developments and particularly on the tank, whose development the U.S. badly
needed. The Army had previously approved in 1959, a plan for development of a
main battle tank to be available by 1964, but it had remained unbudgeted. In
July at a NATO Defense Ministers meeting Strauss proposed, instead of a joint
development project, that the U.S. adopt the forthcoming Leopard tank which
would be available in 1965. As one might expect, this led nowhere. In any
event, with the twin goals of strengthening NATO bonds and sharing the burdens
of weapons development, McNamara maintained the pressure on the NATO allies
for joint programs, and especially the most amenable (i.e. vulnerable) of
them, the FRG. The official line of thought was shown in a memorandum to
McNamara from the Deputy Secretary of Defense, Research and Engineering in
early 1962. It stated that "any funding (for a new MBT) after 1963 should be
contingent on equal participation and support by two or more allies."^

1. The Intergovernmental Organization

On instructions from the two Ministries of Defense, negotiations began in Bonn
in June 1962 with the U.S. proposing the MWDP agreement on components as a

Chapter 10
B-2

basis for the complete tank development. The following year, on August 1,
1963, U.S.

Secretary of Defense McNamara and German Defense Minister Kai-U • nn Hassel
signed an MOU in which th U.S. and the FRG agreed to jointly develop a new
main battle tank on a 50-50 basis. Key objectives therein were to design a
type of tank embodying improved military characteristics that would be agreed
upon by the two governments and to be ready for production by not later than
1970. The MOU also outlined additional objectives including the construction
of eight prototypes in each country (or all 16 in one country if so agreed).
Thus, after almost three years of concerted efforts (dating from the initia-
tion of the Twenty Projects) began the U.S. Armed Forces' first major joint

development venture, for a system to be introduced into its own inventory.

On the heels of the MBT-70, the following year, another major US-FRG project,
the AVS (V/STOL, fighter) was launched, as well as several purely European
projects. It began to appear that both transatlantic and intra-European joint
development efforts were picking up momentum. As we'll see though, most of
the European projects survived while the first two transatlantic projects and
the several that followed them, were to suffer a devastatingly high attrition
ratio. ^

For starters, both the MBT-70 and the AVS projects were created in an era of
financial plenty by the two nations defense ministers. In addition, all of
the key personalities on the U.S. side who figured prominently in its birth
were civilians. Besides the Secretary of Defense, this included the Deputy

Chapter 10

B-3

Secretary of Defense and the Secretary of the Army. In his 1975 study Richard
Trainor brought out that * U.S. Army initially regarded the MBT-70 as not
there own project, but more as a "gift from afar," and "did not appear to feel
that they had total management responsibility for, or control of, the program
until years later."4

Within a few days of the signing of the MOU each nation had appointed its Pro-
gram Manager. The U.S. Program Manager was Brig, (later Maj.) Gen. W. G.
Dolvin and the German Program Manager was Dr.-Ing. Fritz Englemann, a career
civil servant and engineer. Both received the highest-level backing from
their respective governments and immediately set out to gather their respec-
tive staffs.

On October 9, 1963, the Program Management Board, exercising overall control
of the program and retaining full responsibility and authority over all
aspects of the program, held its first meeting in Bonn in an atmosphere
described as one of "absolute parity." The two program managers planned to
meet every two months and created a number of working groups. Principal among
these were legal and finance, concepts, specifications and standards, and mil-
itary requirements. An embryonic Joint Design Agency was also organized, but

staffing it was put off pending the outcome of the on-going discussions.

A major U.S. proposal at this first meeting was to undertake an operations
research study in which leading potential design concepts from both countries
would undergo computer simulated tactical wargaming that would assist the

Chapter 10
B-4

nations in concept selection. Known as the Parametric Design/Cost Effective-
ness Study (PD/CE), this proposal quickly found favor with Dr. Engelmann.

Since no German firms were experienced in this area, it was agreed that a U.S.
contractor would be selected.^

In order to insure the objectivity of the contractor selected for the one-year
study contract, one that would provide input into design selection the con-
tractor was to be barred from the actual development. Unfortunately though,
as it turned out the firm selected in February 1964, Lockheed, had never
designed or produced a tank or similar vehicle. Originally this was evidently
not viewed as a serious drawback, but an advantage in that it didn't thin the
ranks of the already limited number of potential U.S. competitors.

Based on a cost per pound using much less sophisticated tanks and estimating
that a high performance tank could be built within a weight of 35 short tons,
early cost estimates turned out to be well short of the mark.^

As the PMB continued to organize its work during the early meetings the 'abso-
lute parity' developed into what became widely known as the 'einz fuer eniz'
(sic) principle: one for one. That is, for every American, a German or vice
versa at

every level. This was the common approach of the period, seen as well in
several other concurrent joint development projects, such as the Concorde and
the Jaguar. The U.S. Program Manager saw this as beneficial because it
required close collaboration and communication between Germans and Americans

Chapter 10
B-5

across the board, up and down. In addition, the German Program Manager,

Engelmann, favorably compared this "togetherness" with the Franco-German

experiences in their joint program that finally collapsed in 1963 and resulted

in the Leopard I and AMX-30 tanks. "German engineers remained in Germany,

French engineers remained in France... The result...: two tanks, a German tank

and a French tank."

Whether or not 'einz fuer einz1 was the proper solution to the joint manage-
ment problem, the phrase was destined to reverberate throughout all levels of

the organization, becoming the ' Leitidee, ' or central concept.

Early in the program an impasse was reached over whether to use metric of
Anglo-Saxon units in designing the tank. One of the working groups estab-
lished by the PMB was charged with the problem. Each side and in particular
each industry marshalled all sorts of arguments. Under pressure from the var-
ious industry associations and bureaucracies, neither the working group nor
the PMB could reach a decision. Richard Trainor explained this inability to
resolve the issue as having been caused by a feeling that the program was to
establish a precedent for other major bilateral joint development programs.
Both sides feared potential collateral damage to unspecified future programs,
which tended to create rigidity in early negotiations at a time when flexibil-
ity and trust were especially required. In accordance with the MOU the dis-
pute was referred to the ministerial level. ^

The German Minister of Defense was also looking at the decision as a prece-
dent, despite McNamara's desire to limit the problem to the MBT program. In

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B-6

May 1965 McNamara and von Hassel agreed that the Anglo-Saxon system would be
used for U.S. developed components and metric for those developed in the FRG,
but metric fasteners would be used at the interface between Anglo-Saxon and
metric components. These negotiations were time consuming and delayed the
beginning of detail design. ^

By the time of the second PMB meeting in December, it had become evident that
a full-time joint government engineering agency was essential. Working groups
meeting periodically could not provide the necessary day-to-day direction to
Lockheed, to the component developers, or give appropriate and timely guidance
to the key industrial participants after the contracts were awarded. As
pointed out by Hochmuth in his study "Organizing the Transnational."

In the German contractual system, where the contractor had a rela-
tively free hand and "led" the government, such a f 11 -time agency
might not have been absolutely essential. But U.S. tank development
procedures were based on close supervision and could not function
without a supervising agency. 12

This agency, called the Joint Engineering Agency (JEA) was set up Augsburg,
FRG, in September 1964. Its assigned mission was to provide technical direc-
tion, control, and supervision of the program. Though Dolvin had intended to
solve the issue of location by exchanging leadership for location, by force of
personalities, the head of the German team became acting chief of the JEA, as

Chapter 10
B-7

2. Selection of the Industrial Team

In the matching up of government agencies and industrial partners, the MBT-70
program exemplifies a dilemna faced in many other transnational projects, as
well. The following quote from Hochmuth 1 s Organizing the Transnational cap-
tures this:

On the U S. side, the development of tanks had historically been the
responsibility of the Ordnance Corps, which had a long tradition of
"inhouse" capability based on the Army-run industrial arsenal sys-
tem. This meant that there existed a reasonably competent and
experienced staff of engineers and production technicians who would
give detailed guidance and supervision to Ordnance contractors. The
German tradition was to rely almost wholly on industry for leader-
ship in development and production. Consequently Delvin' s staff
envisioned an "Engineering Assistance Contractor" who would work
hand in hand with a well-established group of government engineers.
The Germans, on the other hand, had sought a financially and tech-
nically competent firm with the management ability to run the

development. 14

But here the German Program Manager faced a problem. The FRG's reborn tank
know-how was concentrated at Krauss-Maffei a major heavy machinery firm
located in Munich and controlled by the Flick group that had developed the
Leopard.

The German government, being unwilling to rely solely on Krauss-Maffei as a
production source sought to use the MBT-70 to broaden its industrial base.
Again quoting from Hochmuth:

Chapter 10
B-8

Here two characteristics of the German system came into play.

First, in Germany the engineering team that develops a product gen-
erally stays on during production. This meant that any new contrac-
tors would have to create a new engineering team, and there was a
scarcity of good engineers. Second, a German development contractor
who worked on a cost-reimburseabl e basis for the government was
limited to a very small profit— 3 percent to 5 percent compared to
about 10 percent for U.S. contractors. His real profit came from
production royalties only if and when the government procured the
product in quantity

A related and even more crucial difference was that under German law
the engineer who designed a product or a component also had a pro-
prietary interest in the production royalties and stood to gain a
sizeable sum if his design was produced. This could have meant as
much as a $60,000 bonus to a German designer in the MBT program. I5

Consequently the German government was worried that it couldn't build a strong
enough industrial partner to work with U.S. industry on equal terms.

It was against this backdrop that the German Program Manager approached Harold
Quandt. Quandt did not find the building of a consortium to be an easy task.
However, by early 1964 he had lined up seven firms, among them Porsche,
Daimler-Benz, Krauss-Maffei , and Rheinstahl most of which had been previously
involved in the development of components and were likely candidates for
inclusion in the MBT program. The Deutsche Entwicklungsgesel Ischaft (DEG) was
incorporated in July, 1964.^

In the U.S. the program management office requested bids from U.S. companies
in March, 1964 and General Motors was selected over Chrysler and Ford
Machinery— Aeroneutronics. One of the considerations working in GM's favor, at
least vis-a-vis Chrysler, was its multinational character. It was felt that
its OPEL interests in the FRG would give them negotiating leverage with any
prospective German partners. On this point however, Hochmuth was doubtful as

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FOXC/Disk 443 /Ch . 10/B9-B27

to whether these officials were aware of a long-held GM policy against enter-
ing joint ventures within the U.S. or abroad.

In bidding, GM had allowed for a considerable systems management effort. But
since their bid substantially exceeded the funds available and planned, the
systems-management portion was deleted placing GM in the role of an assistant.
Managerial responsibility remained with the government engineers on the U.S.
program manager's staff.

GM's initial task under the contract was to perform a 6-month study effort,
together with the selected German contractor, preparing a plan for active
development. Immediately after the signing of the contract GM engineers were
off to the FRG to start discussions with their newly formed counterpart, DEG,
and German government officials.

But DEG did not yet have a contract. Principally due to the employees' pro-
prietary rights issue, it was not to get one until November. The German gov-
ernment had agreed to furnish these royalty-free to the U.S. government, but
the problems arising from the German remuneration system were not easily over-
come. There was very hard bargaining. This dilemma was at the root of a
damaging incident later in September.

3. The Inter-governmental JEA and the Inter-industrial JDT Are Set Up in

Augsburg

After discussion at length over how to organize the joint industrial effort at

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B-10

the March 1964 meeting of the PMB, it was decided that it would be better if
the firms selected worked it out for themselves. It had been agreed however,
that whatever concept was selected, the JEA and the joint industry team should
be collocated.

So it remained for the two contractors to decide on the industrial structure.
Hochmuth described the efforts expended towards this end as follows:

In July 1964 Quandt had made a proposal to the FRG which called for
a jointly staffed full-time engineering group supervised by a
bilateral board of directors from the two prime national companies.
But DEG and GM were a long way from a meeting of minds. Therefore,
as soon as agreement was reached on the JEA, the program managers
drafted instructions to the two contractors directing them to set up
an interim Joint Design Team (JDT) to be collocated with the JEA.
Presumably this could be altered when the industries reached agree-
ment. In an effort to reach such an agreement representatives of GM
and DEG had a month-long meeting in Essen, beginning August 14.

This meeting then moved to Detroit. The DEG negotiators, led by
Quandt resisted GM and U.S. efforts to create a large JDT. Later
they countered with proposals which would have reduced the role and
importance of the JEA, a situation more akin to normal German prac-
tice. GM's contract with the United States did not give them total
system responsibility, and since GM was still actively seeking addi-
tional defense work, they would not agree to any moves which might
endanger their relations with the Army. Whatever the factors,
little came of the meeting. There was no powerful joint agency, not
even a "lead" contractor. The two companies simply agreed to staff
the JDT jointly and established basic work procedures.

In September, 1964 the team of government engineers lead by a Gene Trapp and
another team of 15 GM engineers headed by Clarence Crockett arrived in
Augsburg, as the U.S. halves of the interim governmental JEA and the interim
industrial JDT. Trapp and his German counterpart Hellwig felt that the JEA,
with the assistance of the JDT would need some six months to work up a concept

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B— 1 1

and do enough engineering to enable them to return home and carry out the
work.

Hellwig and Trapp reportedly got along well together, and in part because
Hellwig was clearly senior, he became acting chief of the interim JEA. The
'einz fuer einz' philosophy was rigidly adhered to from the beginning, unanim-
ity being required for all decisions. Hellwig' s strong personality however,
reportedly gave him a great, perhaps decisive, influence over the agency.

In the JEA the two sides seemed to function well together, although the Ameri-
can engineers were in general more technically experienced than their counter-
parts. In the JDT however, the situation was not as bright. Engineers were
scarce in Germany, good ones being even scarcer. The DEG companies found it
difficult to convince people to move to Augsburg. Those that went kept

returning to their firms to keep their bosses informed, to get instructions,

and "to be seen". After all, that's where their salaries came from.

Another problem impinging of the JDT's functioning was the negative repercus-
sions emanating from the previously referred to issue over employee's proprie-
tary rights between German government and industry which occurred as the teams
installed themselves in the new office space. As furniture was being moved
into space allocated to the JDT, workmen arrived and erected a partition the
length of the hall. GM was informed that until the German government signed a
contract with DEG affording suitable financial protection for the proprietary
rights of the DEG firms and their engineers, the wall would stay up and
designs would be closely held. Technical discussions were at arms length and
guarded. The Americans were shocked, as was Hellwig. The German government

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FOXC/Disk 443/Ch. 10/B9-B27

only succeeded in getting the wall down in late November after the necessary

agreement was finally signed. But the damage was done and a greater than

necessary psychological barrier continued to exist.

4, Selecting a Design Concept

Though Hell wig had influence, he was not able to convince the United States to

give up or modify those requirements he felt were wrong. The Americans felt

that he was pressing the case of the German firms rather than championing his

own ideas. But this was inherent in German government's approach to defense

contracting. Had there been 1 governental boss at the top, Hellwig could have

asserted his influence. But with two program managers— each with his own

industry to look out for— it was not possible.

GM brought as their contending concepts the ideas around which they had
written their proposal to the United States. What they faced on the other
side were four different concepts each vigorously pushed by the German propo-
nent firms. As a result there were four members of DEG disagreeing and fight-
ing between themselves. Moreover, the German JEA couldn't force a compromise

German proposal— too much was at stake for the firms.

The program managers were helpless to make a decision without a recommendation
from the JEA. After several months, it became apparent that there was no hope
of completing a preliminary design in the 5 or 6 months originally planned.

Each firm continued to defend its own designs. Those German firms with can-
didate components resorted to active "horsetrading". In addition, it was dif-

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Chapter 10
B— 13

ficult to get details of the German designs for objective analysis because of

the secretiveness of the DEG engineers.

In December the preliminary results of a parametric design study became avail-
able, and showed that two similar concepts, a German and an American one, were
the most cost-effective. The PMB instructed the JEA to combine the best fea-
tures of the two concepts that showed up well in a parametric design/cost-
effectiveness study. But, 'What were the best features of both?' 'Who would
decide?'23

Trapp convinced Hell wig on a compromise concept with the driver in the turret
in order to lower the silhouette. The JEA then forced design acceptance by
the JDT, but only after agreement at the PMB level to divert joint funds to
further develop some alternative German components proposed by DEG.

The JEA recommended a concept, which after approval by the PMB in March, led
ultimately to an optimistic public announcement by McNamara and von Hassel.

When McNamara and von Hassel ‘met in May 1965 and confirmed the concept deci-
sion, a news release after the meeting stated:

The German Ministry of Defense and the U.S. Department of Defense
announced today that the MBT-70 program has progressed to the point
that a single design concept was agreed upon last week to meet the
objectives of a quantum improvement in tank fire power, mobility,
and protection... In the light of excellent progress the two minis-
tries are developing presentations on the tank concept and future
developments-production timing for those NATO countries having an
interest in the MBT-70. 24

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Chapter 10
B-14

The design concept had been chosen, but not the components.

"As long as the competing components could be differentiated on the
basis of nearness to completion, a choice could be achieved. But
when a selection had to be made on the basis of judgment, experi-
ence, basic philosophy, or other subjective criteria under the pres-
sure of heavy national interest, no choice was made, and parallel
development was agreed on."25

Trainor cited differences in the two nation's approaches to testing as another
contributing cause to the loss of a considerable amount of time early in the
program. Since the U.S. concentrates more on extensive component testing,
while German policy gives greater emphasis to system-level testing, much time

was consumed negotiating design changes and procedures for their validation.

At the same time that component selections were made, design responsibility,
previously centered in the JDT, was divided up. It had been originally
expected that the tank would be developed in the JDT, but by mid-1965 develop-
ment responsibility had been shifted to industry on a component basis. This

left the JDT with responsibility for the design of the outer hull and turret

and the bookkeeping task of maintaining the master drawings.

"With the... optimistic public announcement of concept selection
those government officials not directly involved in the day-to-day
activities could assume that all was well. But behind the facade
the internal tensions had already weakened the seams holding the
program together."28

It having taken 15 months to hammer out a design concept instead of the five
planned, in May 1965 Dolvin had to request additional funds.

"Costs had risen not only because of delays, but also because the
cost-effectiveness study had not been included in the original
estimate. Neither had provision been made for the extensive compe-
titive studies and subsequent parallel developments. The PMB raised

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Chapter 10
B— 15

the total cost estimate to $138 million in August 1965 but did not
change the overall schedule. ^

5. Other Joint-Design Problems

"DEG, GM, and the components developers, now officially freed from
"control" of the JDT, began all-out efforts to win the parallel
development competition and assert the superiority of their designs.
Agreements that GM thought it had made with DEG were constantly
brought up for revision. GM engineers accused the Germans of bad
faith, and the Germans accused GM of servility to the U.S. govern-
ment engineers. "30

Hochmuth quoted Dolvin on a fundamental problem.

"The decision-making process was diluted by shared authority and
shared responsibility at all levels... There can only be negotiated
decisions... This necessitates "compromise" and compromise leaves
the door ajar to all sorts of national external pressures and pre-
judices... ."31

Though Trainor found it difficult to ascribe any specific item of sophistica-
tion to the joint features of the program, he did feel that these compromises
tended to lead to designs that would appease both design groups, the result
being greater complexity. In addition, he felt that the 50-50 sharing of

development cost contributed to some designers paying less attention to con-

cerns with regards to systems sophistication.

During 1965 the dissension-torn JDT finally gave way to fragmented responsi-
bility between the JDT, DEG and its member firms, and GM. In addition, on the
governmental side, after Hellwig left, the bureaucracy at the BWB gradually
began to reassert its authority over the German JEA, and this bureaucracy felt
little responsibility towards the joint program. But the most critical

Chapter 10
B-16

FOXC/Disk 443/Ch. 10/B9-B27

changes took place among the systems' users. Germans put a far lower priority
on protection compared to mobility than did their U.S. allies. As the tank
became heavier and heavier with each component compromise, resistance in the
FRG grew.33

Yet another design problem can be traced to the attitude changes in the FRG
that accompanied its resurgence within NATO. Although there had been no
change in the basic tenets of German foreign policy ( i . e . , heavy reliance on
NATO and maintenance of strong ties with the U.S.), during the early 60' s:
the status of the FRG in NATO had strengthened, and as this occurred, the dif-
fidence and reserve which characterized the FRG several years earlier began to

give way to a more independent and assertive attitude typical of the other

major NATO member states."

The German tank of WWII was clearly superior to counterpart American
designs. In a similar vein, the German army has been justifiably
proud of their knowledge of tank warfare, since the days of Guderian
and Rommel. The Germans had a different view from the Americans as
to what constituted the ideal tank. For example in the selection of
a gun system neither side would compromise and the result was an
agreement that each country would produce the tank with its own
firepower system. The selection of the fire power system clearly
had substantial influence on other aspects of the design. 35

By 1965, the development and production cost estimates had begun to grow both
due to the substantial weight growth and a growing realization that the MBT-70
was much more complex on a per pound basis than contemporary tanks. By the
time of its cancellation, the MBT-70 prototypes were to weigh over 55 tons.

To further exacerbate these already serious problems there was a gradual

FQXC/Disk 443/Ch. 10/B9-B27

Chapter 10
B— 17

recognition that the planned production quantities and production rates were
incompatible with shrinking Army budgets and programs.

On both sides the officers who had reached the initial agreements were now
being transferred. As new people were brought in, a questioning of all previ-
ous decisions at all levels arose causing considerable problems for the pro-
gram as a whole.

To quote Trainor another problem was introduced by the fact that...

The two countries were producing tanks that were enjoying extensive
foreign sales while there was no solid evidence of Soviet advances
in tank technology that would force an extremely high schedule pri-
ority on the MBT-70 program. Consequently, there was a tendency for
the two countries to attempt to redesign the system more than would
have been the case if there had been a higher priority on system
deployment. 36

Consequently, Krauss-Maffei saw the MBT-70 was going nowhere at about the same
time the first Leopard I tank rolled off the production line in late 1965.

With strong allied interest in the Leopard I surfacing, Krauss-Maffei started
taking ideas from the MBT-70, and began thinking of a Leopard II.

On the government side both the German officers and the civilian officials
began to wonder why they had ever agreed to a 1970 date for the replacement.
The Leopard was good until 1974 at least, and probably well beyond,^7

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Chapter 10
B-1S

6. Development and Production of the Pilot Tanks and the Collapse of the

Program (1966-1970)

By the end of 1965 program slippage had yet to be recognized.

By June 1966 the JDT announced that the design effort for the first pilots was
complete, and the move to Detroit began and was completed by September.

Though its responsibilities were reduced, the JDT was still to be responsible
for keeping track of the overall design.

In June 1966 Dr. Englemann was replaced as program manager by Brig. Gen. Dr.
-Ing. H. Schoenefeld. Gen. Dolvin was routinely reassigned in November and
replaced by Major Gen. E. Burba, a distinguished armor officer but one evi-
dently with no experience in research, development, production, or
38

procurement.

The agreed-on estimated cost rose from $130 million to $200 million by late
1966. Simultaneously, the delivery of the first pilots was postponed to July
1967 and the first production to December 1970— a year later than originally
planned.^

In July, the first pilot tank was delivered by GM; and in September DEG turned
one out. But, they were bare. The fire control system, the loader, and a
host of components were missing, the designs only being 85 percent complete.

FOXC/Disk 443/Ch. 10/B9-B27

Chapter 10
8-19

As a vehicle the tank performed superbly. Despite its weight and size it had
amazing agility and speed.

"All who observed it were impressed. But, resistance to the
increased costs was growing in both countries. The German users
were losing interest, unhappy about the weight and other compromise
characteristics, and above all unhappy about the estimated produc-
tion costs. Meanwhile the Leopard continued to gain favor in
Germany and abroad."40

The program suffered a severe blow in 1967 when Harold Quandt met an untimely
death in a plane crash later in September. Hellwig had termed Quandt the
"soul" of the DEG*

As the pilot tanks were put through their paces, the inevitable problems
showed up.

"Each side took comfort in the problems of the other... Each vigor-
ously sought to make sure the other side's components rigidly lived
up to the specifications and pressed the development of its own
backup components where they existed."4^-

The weight of the tank was now about four tons over the agreed limit. The
United States maintained this was acceptable, but the Germans insisted on
reducing the weight, i.e., a major redesign. The FRG Program Manager felt
that continued progress was very seriously endangered. Unable to agree, the
two program managers referred the matter to the ministerial level.

The Assistant Secretary of the Army and his German counterpart would not admit
failure and decided to continue the program. After intensive exploration of
the technical and financial alternatives, they agreed on:

FOXC/Disk 443/Ch. 10/B9-B27

Chapter 10
B-20

a) A single tank, weighing just slightly more than the previous maximum.

b) Slipping the first production date to 1973.

c) Increasing the joint costs to $303 million with $165 million of that

shared, not 50-50, but in proportion to the tanks produced by each
42

country.

To meet the weight requirement, the radiological armor was reportedly deleted
from the design. Thus a fundamental requirement of the original concept had
been sacrificed, representing a political decision imposed from the top. From
the German military viewpoint, the principal reason for making a tank heavier
than the Leopard was to have radiation-resistant armor.

Poorly served by a structure which could not satisfy either party
and which paralyzed both so that the resources could not be con-
trolled or marshalled to meet either of the natural goals, the pro-
gram was failing. In September 1969, Deputy Secretary of Defense,
David Packard, alarmed by the estimated procurement costs of the
tank after development, asked for a thorough review of the program.
One outcome of this study was an estimate that the cost to comple-
tion would be $524 mi 11 i on. 43

On January 20, 1970, a few days after the date originally planned for the
first production tank to roll off the assembly lines, a press release from the
Department of Defense signaled the end of the joint venture, announcing:

...The Army will reorient its Main Battle Tank development pro-
gram... The modified bi national program involves some revision of
the joint development relationship through which the U.S. and the
Federal Republic of Germany have worked on the tank since 1963.

Each country will now assume unilateral technical decisions and uni-
lateral funding...44

Whereupon the FRG shifted its development efforts over to a Leopard II design.

FOXC/Disk 443/Ch. 10/B9-B27

Chapter 10
B-21

The Leopard II, far less complex than the MBT-70, was developed drawing
heavily developments generated in the joint program. The U.S., on the other
hand, elected to continue unilateral development of an austere variant of the
MBT-70. This lasted for almost 2 more years, at which time it was terminated
under the fire of Congressional claims that this austere variant of the MBT-70
was overly sophisticated and unnecessarily complex.*

Viewed in retrospect, most of the problems of the MBT-70 program were not
uniquely related to the bilateral development features of the program, most of
its problems were exacerbated by joint development

For example, the 1974 GAO study entitled. Benefits and Drawbacks of U.S. par-
ticipation in Military Cooperative Research and Development programs with
allied countries, singled out one such point of exacerabation, the difficulty
of harmonizing differences in military equipment requirements; as being one of
the MBT-70 's major stumbling blocks. Continuing, it summarized as to how
attempts at harmonization led to ever greater complexity and finally U.S.
withdrawal .

In the case of the main battle tank (MBT-70) program, .. .harmonizing was a
problem before and after the program started. . .the cooperative agreement pro-
vided for a degree of commonality with each country having a different ver-
sion, the U.S. version being more sophisticated. As development proceeded,
several amendments were made to the cooperative agreement, each change result-
ing in less commonality. Finally, the United States pulled out of the
cooperative program.

FOXC/Disk 443/Ch. 10/B9-B27

Chapter 10
B-22

As important as this problem was though, the fundamental weakness lay else-
where*

7. Hoehmuth's Conclusions on Structure and Strategy

Had there been one master strategist charged with the successful
implementation of the MB T~ 70 program at the outset, what might he
have done?46

The ideal director would have understood that the specific goal of
developing a tank had antecedent higher-level goals that were
disparate, and he would have made certain that his actions rein-
forced his power by increasing the congruity of his objective with
the higher-level goals* The United States wanted and needed a tank
by 1970, but Germany really didn't. The decision, the impetus,
reflected U.S. needs, U.S. desires to economize, U.S. desires to
strengthen NATO. ...It was not the decision of entrepreneurial
leadership or some other goal-setting process based on calculation.
It was based purely on aspiration. ...The U.S. legal expert who was
termed the ‘architect1 of the original agreement by the top German
negotiator, had been involved in several co-production programs,
including the HAWK, but always apparently as a drafter of agree-
ments, never as an observer of how they really operated. The
Germans were following the U.S. lead in such matters at that time.
...Germany acquiesced for political reasons and a desire to get new
technology, particularly in the fire control and radiological areas,
although the Leopard was meeting her tank requirements for the 1985-
75 period.46

But there was no one master strategist. There were two program man-
agers with separate resources and separate pressures to worry about.
Because they had to seek consensus, and because the very nature of
their formal responsibilities required them to protect the interests
of their separate institutions, they could not reach a decision a
concept (sic). They abdicated in favor of a computer. The computer
supposedly would provide a 'rational', neutral, and objective deci-
sion which each program manager could use to justify the concept
selected to his own people. From the beginning, by inadvertent
design, the strategic arena was not that of a single management
shared by two mutually reinforcing individuals. Rather the program
became two arenas in which two strategies were played out in such a
way as to hinder each other.47

There was still hope when the JEA was formed that an integrated team
could effect a program-wide strategy. But though the Americans and
Germans sat in the same offices, it was abundantly clear that their
bosses were their national bosses.4®

FQXC/Disk 443/Ch. 1Q/B9-B27

Chapter 10
B-23

Prisoners of their national interests, the dual program managers
were helpless to intervene effectively when the firms began to
maneuver to get their individual concepts and their components
selected.49

If DEG had been a solid cohesive firm with a reputation and goodwill
to protect, there might still have been a chance to work something
out with GM. Or, if GM had been given systems management responsi-
bility, the firm might have forced a workable arrangement.50

The JEA, lacking a chief, became a combined gentlemen's boxing ring
and information exchange.

The contractors were given separate contracts with different incen-
tives and even different fee schedules for similar work. 52

There remained the JDT as a possible strategic catalyst. After July
1965 when the concept had been chosen and the components allocated,
the JDT could have provided strategic direction. But again the mem-
bers all were paid by their companies and would have to go back one
day. The mutually agreed work assignment gave to the JDT responsi-
bility for systems type problems including design proposals and to
the prime and subcontractors the responsibility for accomplishment.
This required that the JDT be given systems management and therefore
the authority to direct the contractors. But the JDT was divorced
from contractual, accounting, and payment functions; and lacking
these normal business tools had to rely on the good will of both
prime contractors to accept its direction...53

There was no strategy. The structure of the program guaranteed that
there could not be.54

FOXC/Disk 443/Ch. 10/B9-B27

Chapter 10
B-24

1 Milton S. Hochmuth, Organizing the Transnational: Experience in Trans-
national Enterprise, A.W. Si jthoff , Leiden, the Netherlands, 1974, pp.
103-4.

2 Ibid., p. 99.

3 Richard J. Trainer, Barriers to the Transfer ot Systems Technology to the
United States, Director of Systems Review and Analysis office. Head-
quarters, Dept, of the Army, 1975, p. 3.

4 Hochmuth pointed out that there were two important differences in this
otherwise analagous set of events. One, whereas with the signing of the
MOU, the U.S. negotiators from Paris who had spent months drafting it
faded completely out of the picture, in the FRG there was less disconti-
nuity between the negotiating team and the officials charged with imple-
mentation. In addition, the U.S. representatives involved in the 1962 to
1963 negotiations leading up to the MOU were mostly from the U.S. dele-
gation to NATO, there being no evidence that any experts from U.S.
agencies that would be charged with execution of the program or be the
ultimate users were present. Secondly, while the project manager concept
had become common place in the U.S., this was not the case in the FRG
where the move was greeted with little enthusiasm at BWB (Hochmuth, op.
cit. , p. 105-7).

5 Hochmuth, op. cot., p. 108.

6 Ibid.

7 Trainor cited this selection of an inexperienced contractor for these
studies as a contributing factor to the inaccuracy of the early cost and
weight estimates of 1963 and 1964 (Trainor, op. cit., p. 3).

8 Hochmuth, op. cit., p. 108.

9 Ibid., p. 108

10 Trainor, op. cit., p. 3.

11 Ibid., p. 4.

12 Hochmuth, op. cit., p. 112.

13 Ibid., pp. 113-4.

14 Ibid., p. 109.

15 Ibid, p. 109. NATO published a study in 1976 prepared by AC/94 Working
Group on Industrial Property, entitled, "Regulations in NATO Countries
Concerning Employee Inventions."

16 Hochmuth, op. cit., p. 109.

FOXC/Disk 443/Ch. 10/B9-B27

Chapter 10
B-25

17 Hochmuth op. cit., pp. 113-114.

18 Ibid., p. 115.

19 Ibid.

20 Ibid., p. 116.

21 Ibid.

22 Ibid.

23 Ibid., p. 117.

24 Quoted from Hochmuth p. 101

25 Hochmuth p. 117, quoting Gabbe

26 Trainor, op. cit., p. 4

27 Hochmuth p. 118

28 Ibid.

29 Ibid p. 119

30 Ibid., p. 118

31 Ibid., pp. 118-9

32 Trainor, op. cit., p. 3.

33 Hochmuth, op. cit., p. 119.

34 Ibid., p. 102.

35 Trainor, op. cit., pp. 3-4

36 Ibid., p. 4.

37 To reinforce this point, in 1978 Canada selected the Leopard I for its

forces in central Europe.

38 Hochmuth, op. cit., p. 120.

39 Ibid., p. 121.

40 Ibid.

41 Ibid.

FOXC/Disk 443/Ch. 10/B9-B27

Chapter 10
B-26

Ibid., p. 122.

Ibid., pp. 122-3.

Comptroller General, op. cit..

Hochmuth, op. cit., p. 123
Ibid., pp. 123-4
Ibid., p. 124
Ibid.

Ibid.

p. 22.

FOXC/Disk 443/Ch. 10/B9-B27

Chapter 10
B-27

C. A VS (U.S.-FRG V/STOL FIGHTER PROGRAM)

1. Background

In 1961, the NATO Basic Military Requirement (NBMR) #3 project was initiated
as an attempt to find an alliance-wide solution to a common requirement for a
VTOL light strike reconnaissance aircraft for the NATO Air Forces. In January
1962, NBMR 3 ended in an impasse after which each competing nation pursued its
national project(s) on its own.^ The French continued with their VTOL Mirage
II, ^ the British with their VTOL Hawker P-1127 (which eventually evolved into
the Hawker Siddelley AV-8A Harrier and later the McDonnell Douglas AV-8B
Harrier), and finally the U.S. and FRG with their respective efforts which
will be covered shortly.

2. Organization

Unlike the purely unilateral approach of France and Britain, the U.S. and the
FRG decided to establish a working group to study the feasibility of combining
their separate V/STOL fighter aircraft projects into one joint development
project. This was part of the wider effort to launch joint development
projects that would pick up where the existing joint production projects were
about to leave off. (The American-German MBT-70 was the other major trans-
atlantic project emenating from this effort. All the successful ones, how-
ever, were to exclude the U.S.) The study group recommended that the program
be undertaken jointly and consist of three distinct phases: Conceptual; Pro-
totype Definition; and Acquisition. At the conclusion of each phase a new

FOXC/Disk 443/Ch. 10/C1-C16

Chapter 10
C-l

joint agreement would be signed prior to proceeding to the next phase. The
first phase commenced subsequent to MOU's dated August 1, 1963 and February 5,
1965, In addition, there was an International Agreement on Cooperation in R&D
for V/5T0L aircraft signed on November 14, 1964.

Within the NATO Armament Committee (replaced by CHAD in 1966), the U.S. and
FRG's Senior National Representative (SNR) coordinated policy for the project.
Under them came a joint study group, and later, one for joint evaluation.

Development costs were to be shared on a 50 - 50 basis, but work sharing was

expected to be somewhere around a 60 - 40 ratio in consideration of the U.S.-

FRG troop offset arrangements. The two nations agreed that English would be

the official language for the program and the Anglo-Saxon system of weights

and measurements would be used.

The ultimate weapon system was to be a V/STOL tactical fighter aircraft with
the following capabilities:

(1) All-weather, low-level, high-speed penetration, for delivery of either
nuclear or non-nuclear ordnance at medium ranges.

(2) Air-to-ground strikes in support of ground combat operations at short
range,

(3) All-weather, low-level, high-speed penetration reconnaissance and/or
strike reconnaissance at medium to long ranges.

(4) Air-to-air combat of a self-defensive nature.4

FOXC/Disk 443/Ch. 10/C1-C16

Chapter 10
C-2

The engines for the fighter were covered in an independent parallel program
involving the joint funding by the U.K. and the U.S. of the Pegasus engine
(later to power the Harrier). The Rolls-Royce/Bristol Siddeley Pegasus was a
vectored-thrust vertical-lift engine and had represented a breakthrough in
turbojet engine design.

The Pegasus engine dates back to 1957 when the U.S. , through its Mutual Wea-
pons Development Program (MWDP), provided funding to Britain's Bristol
Siddeley corporation for its development. One estimate put the U.S. contribu-
tion through 1965 at $26 million or 56% of the total development cost. On

October 20, 1965, the U.S. and U.K. signed an MOU for the development of a

direct lift engine for V/STOL aircraft. The U.S. contracted with the
Allison Division of General Motors and the U.K. contracted with Rolls-Royce.

A joint Project Board and an Industrial Program Manager for the vertical lift
engine provided support to the U.S./FRG V/STOL project.^

In addition, two other U.S. contractors, Pratt & Whitney and General Electric,
were both engaged in a contract definition competition for a lift-cruise

engine that would be applicable either for the AVS project or the USAF's FX

and the USN's VFAX projects.^

3. Design Study Program

There were two German contractors, and eventually two U.S. contractors, sub-
mitting proposals during the Design Study phase. Each country was to hold its
own source selection with the understanding that its selectee must be able to

FOXC/Disk 443/Ch. 10/C1-C16

Chapter 10
C-3

work with any one of the contractors from the other country. Subsequently,
the joint evaluation group was to select the best design characteristics from
any or all proposals submitted and come up with a single configuration.

Whereas VIOL activity died down in the U.S. after the NBMR 3 impasse in
January 1962, the German aerospace industry (along with the British and
French) had continued its. national programs.

The two firms selected by the German Defense Procurement Agency, The Bundesamt
fuer Wehrtechnik und Beschaffung (BWB), were VFW GmbH and Entwicklungring Sued
(EWR) GmbH. Both EWR and VFW were brought under contract in late 1963.
Messerschmitt had previously developed and flown its VTOL VJ-101 prototype,
and VFW its VAK-91 prototype. EWR, a jointly owned subsidiary of
Messerschmitt, Boelkow and Siebelwerke took over the VJ-101 from Messerschmitt
in 1964. 9

EWR had a staff of about 250 working on the AVS alone, with an additional but
smaller staff supporting F-104G reliability and maintainability efforts. Most
of the AVS staff was to later reappear in the MRCA Tornado project, providing
the core personnel. Representative of this, EWR1 s AVS Program Manager was
Gero Madelung, later the MRCA ' s third Program Manager, and AVS Deputy Program
Manager was Helmut Langfelder, the MRCA1 s second Program Manager.*0

In the fall of 1964, Boeing was given the first of three subcontracts by EWR
to provide technical support. Manning levels for the Boeing team in Munich
working with EWR started out at seven people in October 1964, and increased to

FOXC/Disk 443/Ch. 10/C1-C16

Chapter 10
C-4

14 the following month with the signing of the intergovernmental MOU. In
January 1965 Boeing received its second subcontract and its Munich detachment
stabilized at approximately 40 people between May 1965 and January 1967. EWR,
for its part, had a small team averaging around a half dozen men in Seattle
during this period.^

The rationale behind the teaming up of the two firms was relatively simple.
Both firms could see the NATO-wide VTOL interest in fighters. On EWR's side,
Boeing, as one of the world's leaders in aerospace and as one third owner of
Boelkow, was a logical choice for a partner for its first post-war fighter
design effort. Boeing for its part, was interested in getting back into the
fighter business (the last Boeing fighter to enter series production dated
from the 1930's).^2

As the U.S. side of the project came on stream later than that of the FRG,
Republic-Fairchild entered the picture in early 1966.

Reflecting a similar but looser teaming relationship between the other two
firms, Republic-Fairchild sent a team to VFW (Bremen) in early 1966, be it a
smaller one than the Boeing team. VFW also sent a small group over to
Republic-Fairchild in the U.S.

The tight EWR-Boeing collaboration not surprisingly led to considerable cross-
fertilization, so that in the end, among the four designs presented in late
1966, the EWR and Boeing designs were virtually identical. The U.S.A.F. took
exception to this and at the last minute Boeing was required to revise its

FOXC/Disk 443/Ch. 10/C1-C16

Chapter 10
C-5

proposed design. In the end the EWR design was judged by the two Air Forces

to have been the best of the four.

Although this would eventually present the U.S.A.F. with a dilemma, it was
cognizant of the close EWR-Boeing relationship throughout, and even encouraged
it. Moreover, the USAF SPO requested both U.S. contractors submit, as an
element in their proposals, their teaming arrangements. Republ ic-Fairchild
had taken another tact than that of Boeing's, however. Feeling this repre-
sented an endorsement of collusion that threatened to bias the competition,
they let it be known they would protest on these grounds if the Boeing design
was selected. The Source Selection Evaluation Board had trouble dealing with
this rather ticklish issue, and opted not to score this part of the proposal,

only noting it. Thus Boeing's successful teaming relationship served, in the

end, as a penalty in yet a second way.

The January 1967 parallel source selections following a joint evaluation by
the SPO, led to the award of a $6 million contract by the USAF's ASD to
Republic- Fairchild and a comparable award to EWR by BWB for the prototype
definition phase. By the month following source selection Boeing scaled down
its 40-man team at EWR to seven (which continued to support EWR under a third
subcontract), while Republ ic-Fairchild built up its team at EWR to about 70 to
80 men. As a residual of the tight EWR-Boeing relationship, and the Boeing
content in the EWR design, the Boeing team in Munich gradually tapered off
during 1967 and into early 1968.

FOXC/Disk 443/Ch. 10/C1-C16

Chapter 10
C-6

An agreement had been reached early in this phase allowing each country's
representative to have unlimited access to all data generated and submitted to

the joint study group. ^

One of the important deficiencies of the project, which appeared during this
phase and continued through to cancellation, was to be the lack of a defini-
tion of the system's operational role.^7

4. Prototype Definition Phase

On April 12, 1967, the individual national efforts, i . e . , the German Study

Group and the U.S. project personnel, were combined into a single group known

as the U.S./FRG V/STOL Tactical Fighter SPO (and the SNR established a project

steering committee). Also in April 1967, the German and American contractors

set up EFJ, headquartered in Munich.

During the Prototype Definition phase EWR and Republic-Fairchild jointly
developed a detailed plan for contractor production of the prototype aircraft.
This plan called for the assembly of seven prototypes in the U.S. and five in
the FRG. The estimated cost of this stage was $500 million.

By June, 1967, interest within the two customer governments seemed to be
drifting toward a more limited prototype program, rather than committment to a
production program.

When the evaluation report of the Prototype Definition phase study was com-
pleted in late 1967, it indicated that the contractor had satisfactorily

Chapter 10
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FOXC/Disk 443/Ch. 10/C1-C16

accomplished the objective of defining general system design and performance
specification. This was qualified, however, by the statement, "the contrac-
tor's Definition phase final report revealed some omissions and treatments in
less depth than was expected." Since this was the contractor's initial propo-
sal, it was generally felt however, that these def iciences could have been
resolved through negotiation between the SPO and the contractor so as to
insure the quality needed by the Acquisition Phase contract. Instead, in
January 1968, the Steering Committee decided to cancel the program for an
assortment of reasons to be discussed in Section 5 of this sub-chapter.

The principal technical deficiencies of the proposal involved a need for addi-
tional analysis in the engineering and technical spheres concerning reliabil-
ity and maintainability, plus a need to further refine cost estimates. The
first two problems of reliability and maintainability were particularly sig-
nificant for such a V/STOL aircraft since it would be operating from dispersed
and unprepared sites, and thus requiring a high degree of self-sufficiency.

Another problem concerning cost estimation involved an apparent unwillingness

of the contractor to share cost risk and its use of an inappropriate learning

curve. These, however, were not the primary reasons for the project's
19

demise.

5. Cancellation and the Issues

The SPO was in the process of validating the final reports of the Prototype
Definition phase submitted by the contractor EWR, when the U.S./FRG Steering

FOXC/Disk 443/Ch. 10/C1-C16

Chapter 10
C-8

Committee decided on January 29, 1968 not to enter the Prototype Acquisition
phase. The reasons given by the U.S. for the project's termination were that
increasing monetary constraints created by the operational demands of the
Vietnam War were limiting R & D projects, and that the USAF had not estab-
lished an operational requirement for the aircraft. Consequently, the SPO and
the program were disbanded by June, 1968.

The lack of a firm USAF operational requirement had haunted the project from

the beginning. The Luftwaffe's interest in a VTOL fighter had been stronger

than the USAF's, but was conditional on having a NATO partner. The Luftwaffe

had no plans to go it alone. Boeing, and later Republic-Fairchild, attempted

to integrate the technology into a specific design, and pursuade the USAF that

such an aircraft was needed. The USAF kept edging up to the line, producing

draft Required Operational Capability (ROC) documents, but wouldn't cross
20

over.

a. On the Plus Side

One objective that was stated as applying to the program generally, but was

not explicitly stated as such in any one of the phases, was the goal of

advancing the technology of both nations. The U.S. advanced its technology

through the investigation of V/STOL concepts as applied to fighter aircraft,

while the FRG received valuable knowledge in jet engine technology. EWR
went on to use the design staff and knowledge to jointly design, develop and
produce the Tornado multi-role combat aircraft (MRCA) with the U.K. and Italy.

FOXC/Disk 443/Ch. 10/C1-C16

Chapter 10
C-9

Another accomplishment of the program was its promotion of the on-going

exchange of V/STOL technical data between the two countries. When the program

terminated, the two countries agreed to a semi-annual conference where

researchers from the AFSC V/STOL Technology Branch would exchange data with

their counterparts in the Luftwaffe.

The 1976 GRC study cited the AVS project as an example of the valuable inter-
mediary role that SPO can play in improving communications and facilitating
the work of industrial firms in a collaborative development project. The SPO
was located at Wright-Patterson AFB, Dayton, Ohio, and incorporated about 20
German engineers. "One of the bright spots of this ill-fated prgram was the
smooth functioning of government and industry people at the technical
level."23

Yet another plus for the project according to Baas, was German government and

industry having obtained valuable insight from its U.S. partners (first Boeing

from 1964-1967 and then Republ ic-Fairchild from 1967-1968) into the systems

approach to the design and development of complex weapon systems. The U.S.

Government and its aviation industry had developed sophisticated management

and production practices that had been proven in past programs. The German

participants were therefore introduced to advanced management concepts, and

the knowledge acquired in the U.S. in systems development. In the words of

one Boeing engineer assigned to the EWR technical assistance team, "German

government and German industry got out of it 80% of what they wanted in both

technology transfer and systems management know-how".

FOXC/Disk 443/Ch. 10/C1-C16

Chapter 10
C-10

Three additional justifications for pursuing the project were that: it com-
plemented the U.S./U.K. Pegasus engine effort; it would probably have had some
net Balance of Payments (BOP) benefits for the U.S. ; and it would contribute
to the increased standardization of the two countries' equipment. But since

the project never advanced beyond the paper studies phase, these obviously
26

came to naught.

b. Reasons for Terminating

One factor contributing to the demise of the U.S./FRG V/STOL fighter program
was "not invented here" (NIH) syndrome. As a means of minimizing competition
head-on with the highly developed U.S. industrial base, European industries
began actively seeking out in the early 1 60 ' s those special fields wherein the

U.S. had expressed little interest. One of these in which a large amount of

development work had been accomplished by the Europeans was VTOL aircraft.
Considerable criticism was directed at the U.S. for not taking advantage of
this know-how through direct purchase or license agreements, but rather learn-
ing what Europe had already learned. In any case, with the decision in the
early 1 70 1 s to directly purchase the AV-8A Harrier from Britain to provide the
U.S. Marines with a VTOL fighter, plus obtain a complete data package for
further development of that system (the AV-8B), as well as produce the Franco-
German Roland II missile system under license, the U.S. attitude belatedly
began to show signs of change on this point.

One underlying reason for the program's termination was reportedly the reluc-
tance on the part of the Air Force, with some backing in DDR&E, to place the

FOXC/Disk 443/Ch. 10/C1-C16

Chapter 10
C-ll

development of a front-line fighter in the hands of another country. This

concern involved both considerations of security and the difficulties antici-

pated in international R&D . Just compare this project, or the MBT-70 for
that matter, with the successful NATO Seasparrow project, where the DoD was
willing to risk joint engineering development and production of an improved
version of the USN (Basic) Seasparrow system (with only about 10% European
content) .

An additional factor, which is probably the most important single factor con-
tributing to the program's demise, was the DoD's budget scrimping on all non-
Vietnam-oriented programs. This resulted in the DoD's curtailing of several

high-risk research projects, including the V/STOL fighter and an Army corn-

petition for a high-speed helicopter. Although less important, the FRG, as
well, was experiencing financial problems at the time. The Ministry of
Defense was feeling this strain and was reducing its research expenses in
favor of operating expenses and the direct purchase of U.S. military equip-
ment (e.g., the F-4 Phantom covered in Chapter 11).

Finally, there are the implications of the lack of an operational mission, a
point already covered under the Design Study phase. Neither during the Design
phase nor the Prototype Definition phase was there any evidence that the USAF
had defined an operational mission for a V/STOL fighter aircraft, a condition
which persists to this day. This lack of definition contributed to the com-
plexity of the aircraft which the industry-government team was attempting to
design. The engineers had to design an aircraft that would possibly be used
in interdiction, close air support, and reconnaissance roles. The concept of

FOXC/Disk 443/Ch. 10/C1-C16

Chapter 10
C- 12

dispersal with minimal support further increased the need for a complex air-
craft. But this complexity in turn resulted in decreased reliability and
maintainability which either increases the quantity required* or increases the
need for logistic support. These alternatives proved to be both expensive and
working at cross-purposes with the original concept of concealment and
mobility.^0

6. Summary

According to the Baas study the program cannot be considered a complete fail-
ure. Part of its objective was to advance technology and promote the exchange
of data* both of which were accomplished, though the desirability of the lat-
ter point was somewhat debatable as far as the Germans were concerned. The
German government, along with Messerschmitt and Boelkow, also obtained valua-
ble insight into the systems approach to design and development of complex
weapon systems. This was transferred directly to the subsequent Tornado MRCA
effort.

The difficulties of the program, which in any event never had more than luke-

warm backing in the U.S., can be classified as financial and technical.

Probably the most important single factor contributing to the program's early
demise was the U.S. defense budget being stretched in order to support the war
in Vietnam, causing R&D efforts to be curtailed. The cost of the proposed
program was highly uncertain with the government and industry differing as to
the amount and the sharing of risk. The FRG was also forced to reduce R&D

FOXC/Disk 443/Ch. 10/C1-C16

Chapter 10
C— 13

funds so as to assist in offsetting the cost of maintaining U.S. troops in the
FR6.32

The technical difficulties stemmed from the USAF's inability to define an
operational mission for a V/STOL fighter. The anticipated problems in relia-
bility and maintainability were a result of the complexity of the aircraft

design. And finally, there was strong feeling in the U.S. and the DOD towards

procuring only weapon systems of U.S. origin.

And as one final point, the teaming of firms from different nations prior to a
common source selection surfaced a critical issue for joint design and devel-
opment projects where the U.S. is one of the participants. The issue emanates
from the differing U.S. and European competition policies (generally speaking,
structural versus behavioral) and especially as they apply to defense procure-
ment. The USAF's dilemma and the reversal of its position on the Boeing- EWR
(i.e., Messerschmitt-Boelkow) teaming relationship in the final days of the
competition provides yet another example of the difficulty of finding a good
fit when the U.S. is a partner in a joint design and development project.

7. Sequel

As the FRG was depending on the AVS program (at least originally) to provide
its next generation fighter, a feasible design and partnership was required to
replace it. Fortunately for the Germans, the British as well had found them-
selves in a similar situation with half a fighter program, after the French
had dropped out of the two year old Anglo-French Variable Geometry (AFVG) air-

FOXC/Disk 443/Ch. 10/C1-C16

Chapter 10
C-14

craft project in mid-1967. Discussions began in May 1968 between the British
and German governments (joined by several others) in Brussels within a NATO
working group and led to the signing of an MOU later in the year. The new
aircraft was to be Multi-Role Combat Aircraft (MRCA) Tornado (See Chapter 8).

Meanwhile the intra-German and interallied partnerships established during the
AVS project were to have a decisive long-term impact, in parallel with the
launching of the MRCA project. Consolidation of the German aerospace industry
had proceeded with the owners of joint EWR subsidiary finally making the
plunge. Messerschmitt, Boelkow and Siebelwerke merged in mid-1968 to form
Messerschmitt-Boelkow which, now compliant with the German government's
demands for concentration of the aerospace industry, was designated by the
government to be the German partner firm in the new joint project, the MRCA
Tornado. Furthermore, MB's selection to be the German industrial participant
was the result of its having won the prior AVS competition. This in turn was
the fruit of the intense collaborative relationship built up over the 1964 to
1967 period with Boeing. The year following the MB merger and the launching
of the MRCA Tornado project, 1969, the consolidation efforts took another step
further with MB-Hamburger Flugzeugbau (owned by the Blohm family) merger to
form MBB.

The other AVS partner, the U.S. Government, followed its own course which
indirectly led to another joint VTOL fighter project involving the U.S. and
the U.K. during the 1970' s. Though a VTOL mission never did surface in the
USAF, another service, the U.S. Marine Corps, did have a requirement for a
VTOL ground support fighter. In 1971 the USMC bought into the British AV-8A

Chapter 10
C- 15

FOXC/Disk 443/Ch. 10/C1-C16

Harrier program with a purchase of 110 aircraft and the technical data pack-
age. The Pegasus engine utilized by the Harrier was the fruit of an earlier
joint U.S.-U.K. effort interrelated with the AVS. After a series of joint
and unilateral improvement programs the two governments went forward in 1981
with the 400 aircraft AV-8B Harrier program (See Chapter 9).

FOXC/Disk 443/Ch. 10/C1-C16

Chapter 10
C-16

1 See Chapter 5 for a description of the ill-fated NBMR procedures (1959—
66) and a short history of NBMR 3 in particular.

2 The Mirage II flying test bed/prototype underwent a short history of con-
siderable hover and flight testing prior to its crash in the summer of
1962. Deficiencies centered on the flight control system and engine
instability. Following the crash, Dassault built a new and larger VIOL
aircraft, the Balzac, which though externally similar to the Mirage II
was a completely different aircraft.

Back in 1959, Dassault and Boeing had signed a technical exchange agree-
ment on VTOL aircraft. Boeing had been doing considerable wind-tunnel
testing on a design similar to Dassault's Mirage II. Over the following
three years Boeing provided Dassault with wind-tunnel test data in
exchange for Dassault's flight test data. The agreement proved to be a
very beneficial one from both firms' viewpoints. (Source: Tom Lollar,
one of several Boeing engineers involved in the effort.)

3 Capt. Melvin T. Baas, United States Involvement in Co-development: An
Analysis of the US/FRG V/STOL Fighter Aircraft and NATO Sea Sparrow

Project, a thesis presented to the Air Force Institute of Technology,

August, 1971, pp. 26 and 32.

4 Ibid.

5 This issue resurfaced in the fall of 1971, during negotiations between
the U.S. and U.K. Governments, and Rolls-Royce (having since absorbed
Bristol Siddeley) and Pratt & Whitney and General Electric, over the
licensed production of the Pegasus 11 (powering the AV-8A Harrier) and a
joint license-development program based on the Pegasus 11. The U.S.
Government claimed it retained limited proprietary patent rights to the
Pegasus engine from the previous MWDP funding. This issue took several
years of negotiations at the governmental level to resolve. (Aviation
Week and Space Technology, October 8, 1971, p. 16).

6 Baas, op. cit. , pp. 17-18.

7 "Cancellation of U.S. /German V/STOL Fighter Won't Hinder Important
Lift/Cruise Engine," Aerospace Technology, Feb. 12, 1968, p. 12.

8 Baas, op. cit., p. 23.

9 Interviews with Robert E. Kesterson, U.S. Roland Marketing Manager,

Boeing Aerospace Company., February 1982, formerly of the Boeing AVS
engineering staff in Munich from October 1964 to January 1968.

10 The first MRCA Program Manager was Ludwig Boelkow himself.

11 Kesterson, op. cit.

12 Ibid.

Chapter 10
C— 17

FOXC/Disk 443/Ch. 10, p. C-17-C-18

13 Ibid.

14 Ibid.

15 Baas, op. cit., p. 23.

16 Ibid., p. 24.

17 Ibid., p. 28.

18 Ibid., p. 17.

19 Ibid., pp. 28-30.

20 Kesterson, op. cit.

21 Baas, op. cit.

22 This point was evidently somewhat debatable. A contrary view was
expressed in the FRG a year after the project had ended— a view which
also is a good example of the sensitivity of the issue of data exchange.
At that time the next generation of fighters was expected to be V/STOL.
This was a field in which the FRG had done considerable research and
operational testing. In the words of the one official, "We exchange all
our V/STOL information with the U.S. We are very much afraid that
eventually we will be buying back our own know-how." "U.S. Pressure
Against European Fighter Seen", Aviation Week & Space Technology, January
13, 1969, p. 20.

GRC op. cit., p. 257.

Baas, op. cit., p. 28.

Kesterson, op. cit.

Ibid., pp. 27-8 and 30-1.

Another such area was all-weather, short-range,
systems, i.e., Roland, Crotale, and Rapier.

low altitude air defense

"Cancellation", op. cit., p. 12.

Aviation Week & Space Technology, Feb. 12, 1968,

p. 27.

Baas, op. cit., pp. 33-4.

Aviation Week and Space Technology, January 29,

1968, p. 28.

Baas, op. cit., p. 35.

Ibid.

Chapter 10
C- 18

FOXC/Disk 443/Ch. 10, p. C-17-C-18

D. MALLARD

1. The MOU (1967)

The U.S., Canada, UK, and Australia agreed in 1967 to jointly develop a large
scale communication system for tactical warfare purposes in the 1975 - 1985
time frame. The system, representing the largest and most involved communica-
tions project for tactical purposes seen to date, was to involve a combination
of radios, microwave, and satellites, as well as being capable of voice and
message traffic (with the emphasis on the latter).^

The objective was to procure the system at a reasonable cost for the common

use of the Armies, Navies, Air Forces and Marine Corps of the four nations,

while taking advantage of the broader base of technology that could be offered

by the four national industries during development. A worthy, if overly

ambitious objective.

Project Mallard began officially on April 6, 1967 , when the Deputy Secretary
of Defense signed a tripartite MOU for the U.S., one which Canada and
Australia had signed several days previ ousl y . Britain, the project's origina-
tor, did not sign immediately. The British held out for a commitment for a

fixed percentage of Mallard production.

The original MOU included the following key features:

the R&D effort would be distributed nationally in proportion to their
financial contributions.

patent rights would be shared by the participating nations.

Chapter 10
D-l

each nation's industry would have the opportunity to compete for a share
of production equal to that go vernmnent' s requirement.

Negotiations continued with the British after the signing of original MOU, and

led to the signing of a revised one in September, 1967. Though not successful

in obtaining a fixed percentage in the end, the British were satisfied by a

compromise provision which involved competition on equal terms with the other

three national industries for 50% of the project - with the other half being

guaranteed nationally on the basis of the number of systems required.

2 . Managing the Concept Formulation Phase (1967-69)

The focal point for direction and supervision of the four national efforts, a
Program Management Board (PMB) and the International Joint Engineering Agency

(JEA) were set up at Fort Monmonth, New Jersey. The PMB consisted of the
four national Program Managers. The JEA was the professional engineering
entity which identified and recommended the work to be accomplished, and moni-
tors its accomplishment, particularly from a technical and systems point of
6

vi ew.

Most of the work was accomplished by the four national industries under the
direction and supervision of the national and international management and
technical authorities. As of November, 1968, over $19 million had been obli-
gated for development work by industry including:

three major competitive system studies (two by U.S. firms and one by
a Bri tish fi rm) , and;

Chapter 10
D-2

27 Technique Support efforts directly related to the application of
communication/computer technology to the Mallard system.7

Hardware companies that were providing competitive recommendations for the
ultimate design of the Mallard system, its subsystems and equipments included
RCA;

Sylvania;

Litton Industries;

IBM;

Plessey;

Marconi ;

Standard Telephone and Cables, and;

General Electric.

The competing software companies included:

Hughes;

Westi nghouse;

Operations Research, Inc., and;

Planning Research Corp.

A large number of other firms from the four nations were doing Technique Sup-
port work. ^

As of November, 1968 , the Program Management Board (PMB) could report that,
after 18 months of initial organization and development work on the project;
the Concept Formulation phase of the program was completed by mid- 1969 , and

Chapter 10
D-3

was followed by the commencement of the contract definition phase, which was

expected to be completed by mi d- 1971 , to be followed by engineering develop-

ment and initial production in 1974-75 .

3. The Joint Project Unravels During the Contract Definition Phase (1969-70)

However, by 1969 signs of trouble were beginning to appear as a result of var-
ious program difficulties covered below. In reviewing the fiscal 1970 Appro-
priations Request, Congress asked that the DOD consider the discontinuance of
U.S. participation in the project. On October 3, 1970, in the face of con-
tinued Congressional objections to the project and a lack of support within
the DOD, Deputy Secretary of Defense David Packard announced the termination
of U.S. participation in the Mallard project The program was cancelled as a
joint venture the following month, after some 3 years, and for the U.S., an
investment of some $34 million.^

4 . Trainer's Analysis: Lessons Learned

The following 8 points were listed as key problems of the Mallard project by
Richard J. Trainer in his 1976 study Barriers to the Transfer of Military
Systems Technology to the United States.

( 1) Source of Requirement

Instead of originating from an operational requirement identified by the user,
the concept's source was the international R&D community, the users being
brought in somewhat later. The users representati ves having been less

Chapter 10
D-4

involved early on in the project, is felt to have contributed to its early
12

demise.

(2) Unity of Requirement Community

The Armor, Infantry and Artillery branches of the U.S. Army tend to exhibit
considerable solidarity when one of its weapon systems are subjected to criti-
cism. The Mallard program, however, was defended by the Signal Branch, a
branch lacking the clout typical of those associated with combat systems.

This problem was doubtlessly further exacerbated by the difficulty involved in

conceptualizing a complex electronic system.

(3) Requirement Not Specific

The statement of the requirement for Mallard was not specific with regards to

frequencies, line capacities, computer capacities and interoperabil i ty with

related electronic systems. This latter problem was further aggravated by a

lack of strong central control of the design of these related systems.

(4) Resource Requirements Not Specified

There was no agreed on estimate for the total cost of R&D or procurement, the

phase-in schedule, or how the overall communication system was expected to

operate during the long phase-in period.

( 5) Other Military Services Not Sufficiently Involved

Mallard was to involve the other U.S. military services, not just the U.S.

Army though the Army was to be the largest user and was executive agent for
the United States. Even though it is natural that the Army was the principal

Chapter 10
D-5

provider of manpower, the number of full-time members each assigned to the
project office is somewhat indicative of their individual levels of involve-
ment. As of mi d- 1 969 the Army had assigned 109 personnel , the Air Force 13,
and the Marine Corps. 1 . ^

(6) NATO Interface

The value of such a system as the Mallard would be principally its use in the
event a war in Europe, one which would involve our NATO allies, especially the
FRG . Yet, the FRG was not involved in the program. Canada suggested that
Mallard be offered to NATO as a cooperative project. Later the UK suggested
that the FRG be included as a fifth partner. Nothing ever came of these sug-
gestions , though.^

In any event, after the program's cancellation, the need for better tactical
communications inter-operability still remained. The prospects for such a
project shifted to the NATO level shortly thereafter. The NATO Integrated
Communications System (NICS) organization was established the following year,
in May 1971. The plan was that NICS would ultimately include a totally inte-
grated automated satellite communications system which could link tactical

1 8

units through mobile stations sometime in the late 1980's.

(7) Organizational Structure

The organizational structure for Mallard was complicated, undoubtedly the
result of the involvement of four nations, plus the four American services.
This complex structure most likely contributed to the lack of discernible
progress during the first two years of the program. This in turn resulted in

Chapter 10
D-6

the undermining of the authority of the Mallard Program Manager as higher

level staff offices became increasingly involved in program detail.

( 8) Congressional Attitudes

Some observers attributed the programs lack of success simply to a lack of

Congressional support, but the previous paragraphs provide evidence that there

was more to it than just that. Nevertheless, it is true that by 1969 - 1970,

the Congressional attitude toward Mallard was decidedly unfriendly. The

Mallard project was caught in the wake of Congressional disenchantment with

the slippages and cost overruns of the MBT-70 program.

5. Sequel: From Mallard to Tri-Tac and the RITA-based MSE System

As is often the case with these inter-allied programs this was not the end of
the matter. With the collapse of Mallard, the US and the UK embarked in 1971
on their own battlefield communications systems, Tri-Tac and Ptarmigan
respecti vely. The British met an urgent interim requirement by using existing
hardware from the Bruin system. 21

The U.S. Army's Tri-Tac was aimed at providing a tri-service tactical
communication system which would make use of the existing analog inventory,
while at the same time establishing common standards which would permit the
use of newer digital technology as it became available.

In the original Tri-Tac system, mobile radio subscriber equipment was to be
used only in forward areas where it would be impossible to locate mobile

Chapter 10
D-7

nodal switching centers. However, in 1982, the US Army discovered that it was
practical to use these large containerised nodal switches at divisional HQ
level and it was decided to use mobile subscriber equipment (MSE) from brigade
HQs down, with the original Tri-Tac units used in the rear echelons. 22

This change of plan was due in part to the size and weight of these switches,
and also as a result of revised operational requirements which were affected
by a shortage of skilled military personnel required to operate the original
system.

As a result of this change, the original SI billion MSE part of the program
increased to over $4 billion, with a requirement to equip 25 US divisions. In
1983 the US Army called for new bids for this greatly expanded MSE program.

Since no suitable hardware was available from any of the US electronics
companies and because of the desire by the Pentagon to get the Tri-Tac program
back on course as quickly as possible, the USA was forced to look offshore for

a system. 23

As a result of the Mallard experience and the relatively close liaison between
the US and UK military, the US Army based much of its original MSE thought
around the single channel radio access element of the Ptarmigan system and at
one stage it looked as if the Ptarmigan equipment would be the automatic

choice.

Chapter 10
D-8

Plessey, the prime contractor for Ptarmigan, teamed up with Rockwell and ITT
to present its bid to the DoD, while GTE joined with Thomson-CSF to offer a
system based on the mobile radio elements of the French RITA system.

The MSE competition developed into one between the more advanced digital
technology and largely autonomous single channel radio access element of
Ptarmigan, against the field-proven hardware and the relatively high US .
domestic content of RITA. 24

Once the decision to adopt elements of one or the other allied system had been
made, the much troubled US Tri-Tac system could move back on course. The
lengthy detour by the US Army had been forced upon than by the need to change
the concept of a major part of the system.

The source selection was held up through the spring and summer of 1985 as a
messy diplomatic situation developed. On the one hand French authorities were
reported to have intimated to Secretary of Defense Weinberger their stalled
AWACS buy could be broken loose if the US made the right choice. The British
for their part were trying to appeal to their prior record of purchases and
commitments. Appeals to Reagan by British Defense Minister Heseltine through
letters and via telephone calls were followed up by Prime Minister Thatcher's
intervention with Regan on Plessey's behalf. Again Thatcher was pushing
Britain's record of being a 'better' ally, citing the support of SDI in
particular. One DoD source was quoted as saying he "had never seen such a
power play" among our NATO allies. In the early fall the French system was
selected .

Chapter 10
D-9

The RITA system based MSE included the modified GTE AN/TTC-39 S-200 single
shelter configured circuit switch (telepone exchange), the RITA radio access
unit, the Canadian Marconi AN/GRC-103 or GR-083 1 ine-of- sight radios, the GTE
SB-3614 unit level switchboard, a digital group mi 1 ti plexer , the RITA mobile
subscriber radios set, the Magnavox TA-954/M2 digital non-secure voice
terminal, the Ericsson MF-15 down-the-hi 1 1 microwave radio link, the Magnavox
AN/GXC-78 digital facsimile and a RITA-based system control function. 25

It is a hybrid system with GTE claiming that 65% of the total budgeted
expenditure will be spent in the USA-generating in the order of 75000 US jobs.

A typical corps-level MSE deployment over a 37500 km square area could involve
some 8100 subscribers of which about 6200 would be static and 1900 mobile. 26

In the end, after weaving in and out various collaborative arrangements with
the UK, the tortuous route ended up on the opposite shore of the channel. The
US Army's tactical battle-field communications system is ultimately to be
satisfied in the late 19 80 ' s through an arrangement along the lines of Mode #4
of industrial collaboration in lieu of the original #5 approach of the late
1960‘s. The history of the U.S. Army's tactical communication system serves
as another reminder that the inter-allied thread has become an increasingly
common element in our acquisition process, whether it be by design or
happenstance.

Chapter 10
D-10

Richard J. Trainer, Barriers to the Transfer of Military Systems Technol-
ogy to the United States, 1976, p, 5. " ~ ~

W. J. Baird,
1968, p. 9.

"The Mallard Project - An Editorial," Signal , November,

3 Trainor, op. cit. , p. 5.

4 Ibid.

5 Fort Monmonth is the location of the Army Communication Agency, the
Satellite Communication Agency, eight electronic communication laborator-
ies and the associated procurement offices.

6 Major General Paul A. Feyereisen, USA, "Mallard - Its Direction and Con-
trol," Signal , November, 1968, p. 13.

7 Ibid., p. 17.

8 Ibid., p. 15.

9 Ibid., p. 13.

10 Trainor, op. cit., p. 6.

11 Comptroller General of the United States, Benefits and Drawbacks of U.S.
Participation in Military Cooperative Research and Development Programs

with Allied Countries, 1974, p. 38.

12 Trainor, op. cit., p. 6.

13 Ibid., p. 6.

14 Ibid.

15 Ibid., p. 7.

16 In a 1974 GAO study on Benefits and Drawbacks of U.S. Participation in
Military Cooperative Research and Development Programs with Allied Coun-

tries, the reason for the U.S. . having pulled out of the program, was
stated to have been primarily this; one of interservice
incompatibilities.

17 Trainor, op. cit., p. 7.

18 See Chapter 3.

19 Trainor, op, cit. pp. 7-8.

20 Ibid., p. 8.

21 Robert Raggett, "US Tri-Tac system set to get back on course, 11 Jane's
Defence Weekly, 16 November 1985 p. 1067

Chapter 10
D— 11

FOXC/D-Footnotes/Ch. 10, p. D-ll-12

22 Ibid.

23 Ibid.

24 Ibid.

25 Ibid.

26 Ibid.

Chapter 10
D— 12

FOXC/D-Footnotes/Ch. 10* p. D-ll-12

E. NATO PHM

1. Introduction

The Patrol Hydrofoil Guided Missile (PHM) ships are vessels that combine both
marine and aircraft technologies. They are high-perf ormance, rapid reacting
combat systems featuring foilborne top speeds in excess of 50 knots!. Six
PHM's have been built to date for the U.S* Navy: the Pegasus (PHM-1),
designed and built for the NATO program, and its five production series sister
ships. Armament consists of: eight RGM-84A Harpoon anti-ship missiles; a 76
mm dual purpose gun for use against air, surface, and shore targets; two MK-
34 chaff launchers for defense against anti-ship missiles2; and a MK-92 Fire
Control System to tie them all together. Their technological sophistication
makes them well suited for their mission— to operate offensively in coastal
waters and narrow seas against major surface combatants and to conduct
surveillance screening and special operations. Weighing only 243.5 metric
tons and having length of 40 m, a PHM probably carries more weaponry than any
other ship its size in the world.

The PHM has amply demonstrated the anticipated technical performance
and mission capability that was projected at the program outset.

More than this, Pegasus has made many converts of those who could
not earlier conceptualize the tremendous improvements that hydro-
foils offer in operating capability or believe that such technology
could be provided in an effective reliable system suitable for the
Fleet. 3

The PHM ship design resulted from NATO Navy Armanent Group activities between
1969 and 1972. Although the design is based on the much smaller (58.5 ton)
USN/Boeing PGH-2 Tucumcari , the system does incorporate a substantial amount

of European equipment.

The genesis of this system represents one of the most superb marketing jobs
ever accomplished through the NATO acquisition process. Unfortunately much
like earlier NATO projects such as the Atlantic maritime patrol aircraft, the

E-l

Chapter 10

NATO PHM program reflects the common problem of retaining the original par-
ticipants in a joint design and development project (Modes #3, #5, and #8 of
industrial collaboration) all the way through to production. Difficulty was
experienced in maintaining the stability of the lead-ship design and develop-
ment program. The U.S. is currently the only country to have undertaken pro-
duction. Potential sales to, or production by, NATO members and other allied
nations might yet develop over the next several years.

Additionally, the tergiversation within the U.S. government during the 1976-77
period, when the program was on the verge of cancellation conjures up visions
of the UK's plight after the U.S. (i.e., McNamara) unilaterally cancelled the
Skybolt air-to-ground missile project in 1962. The UK had previously
cancelled its own unilateral effort with the understanding that the U.S.
would continue Skybolt to fill both nations' requirements.

This aspect of the NATO PHM program brings out something that Europe's three
medium powers (France, the FRG, and the UK) often emphasize, i.e., the
vulnerability of such programs to unilateral cancellation,^ with the dependent
participants being left high and dry. There is also the loss for the other
participants to be considered— the technological capabilities generated through
the R & D effort. More specifically, a third and closely related considera-
tion is U.S. technological dominance and the long term European effort to
counter it. Therefore the Europeans have preferred 'joint' development over
the U.S. 'interdependent' development preference. The DOD's former policy of
supporting interdependent R & D involved the design and development work being
unilaterally carried out within one nation (which was more often than not the
U.S.), with the end product being available to all partners to the agreement
for licensed production. 5 The NATO PHM project was much more in line with the

E-2

Chapter 10

Source: Boeing PHM-1 Pegasus

U.S. approach than that of the Europeans. The interest of the DoD in Mode #8
of industrial collaboration reflects an attempt to bridge this gap through the
'Family of Weapons' concept.

2. The NATO Program is Launched

a. From Project Inception in 1969 to Signing of the MOU in 1972
A decision to proceed with a NATO PHM project was reached in October, 1971, by
three nations working within the NATO Naval Armament Group's (NNAG) Project
Group 6. After a year long study, the NNAG had selected the hydrofoil as the
best of the competing platforms (Conventional Fast Patrol Boats (FPB's) and
hovercraft) for a high-speed craft capable of surface attack, surveillance,
and barrier operations to meet the growing Soviet surface-to-surface missile
threat.

In November 1971 Boeing Marine Systems was awarded a sole-source letter
contract by the U.S. Navy for feasibility and "trade-off" studies to determine
the size and performance characteristics of a new class of submerged foil
military hydrofoil. The ship was to meet the differing mission and combat
system requirements of the navies of Italy, the Federal Republic of Germany
(FRG), and the U.S. A.

The ship's primary mission was to augment the capability of the NATO main sur-
face forces, particularly in the Mediterranean and Baltic seas. Although PHM
employment was expected to vary according to national concepts of operations,
general peacetime operations were to consist primarily of direct surveillance,
either in support of task force operations or through shadowing of potential
enemy forces, and area surveillance of straits and exits through restricted

E-3

Chapter 10

NATO PHM Participating Nations

An Egyptian Osa-class missile boat underway in 1974.
(Navy photo by E. V. Sneed.) The proliferation of such
small but lethal craft has concerned naval analysts for years,
but the advent of the Phalanx may remove the possibility
of “ cheap kills. ”

waters. Wartime operations were to detect and attack enemy surface ship
forces .

Back in mid- 1969 one of the NATO Military Commanders (NMC's), CINC South (the
Armed Forces South Command in Naples, Italy) had presented to NATO's
Conference of National Armament Directors (CNAD) a requirement for a large
number of fast missile patrol boats.

The NATO requirement was generated subsequent to the October War and the
sinking of an Israeli destroyer, the Elath, by Styx missiles launched from
Egyptian patrol boats. It was initially a response to the threat posed by
missile-armed fast patrol boats in the Mediterranean to larger allied
combatants .6

The NATO Navy Armament Group's original sub-grouping working the problem.
Special Working Group (SWG) 6 on small missile craft, had originally included
a wider grouping of 11 nations. SWG 6 first met in the fall of 1969. In
addition to Italy, the FRG, and the U.S., there had also been Canada, Denmark,
France, the Netherlands, Norway, Portugal, Turkey and the UK. The British,
French, Germans, and Canadians were originally promoting their own projects
for adoption by several nations to form the basis of a NATO effort, but the
U.S. sponsored project eventually prevailed for the reduced grouping of
nations.

The threat was soon expanded to include major combatants as well as fast
patrol craft, with the result that the entire Allied Command Europe was
considered as the threatened area. Further deliberations were deemed
necessary and, during the early months of 1970, NATO Exploratory Group Two was

E-4

Chapter 10

established to study the concept of a Common Fast Patrol Craft (Guided
Missile). This group completed its deliberations in September 1970 and
concluded that the submerged foil, hydrofoil craft, basically of the 140-ton
size proposed by the United States Navy, was the craft most suitable for
meeting the NATO mission requirement. The NATO Naval Armaments Group received
this report the following month, accepted the recommendations contained
therein, and approved the establishment of NATO Project Group 6 to conduct the
planning stages of the program and the initial determination of the ship
characteristics. 7

Under the sponsorship and chairmanship of the United States, Project Group 6
held its first meeting in November 1970 at NATO headquarters in Brussels,
Belgium and reached general agreement on the management approach to be
pursued. It was established that early phases of the program would consist of
several "open ended" meetings with participation by all interested countries.
Through June 1971, a series of four "open" meetings were held with representa-
tives from 10 nations. During this period, United States' representatives
presented further hydrofoil baseline design and cost estimates, and ultimately
a draft outline for a Memorandum of Understanding (MOU). The design data pro-
vided for the operational performance agreed upon by Exploratory Group Two and
incorporated previously expressed national requirements. In addition, as
program sponsor, the United States, committed itself at the June, 1971 Project
Group 6 meeting to the building of two PHM lead ships if a design satisfactory
to at least one other NATO nation could be achieved. 8

At the conclusion of the June 1971 meeting of NATO Project Group 6 in London,
it was mutually agreed that active participants of subsequent meetings would
be limited to those nations who had formally declared their intent to proceed

E-5

Chapter 10

with the cooperative hydrofoil project, and subject to conclusion of an agreed
MOU, to formally enter the program as an "engaged" nation and commit resources
thereto. Letters of intent were signed and delivered to the U.S. at the July
1971, NATO Project Group 6 meeting by the governments of Canada, Italy, the
FRG, and the UK. 9

All the others had to drop out of PG-6 following agreement on the joint fund-
ing of a feasibility study. The nations which originally opted to stay on as
observers (i .e., non-voting members) of Project Group 6^ were joined later in
the year by Canada, and then the UK, both of which backed away from their
initial commitments. None of the observer nations ever elected to actually
join.

In October 1971, the United States announced its intentions of awarding the
lead ship design and construction contract to Boeing, and that the initial
effort under the contract would be for additional feasibility design studies.
The objective of these studies was to obtain clear agreement on a specific
common ship design which would satisfy all engaged nations' requirements .
Further, due to the advance in program schedule without having yet obtained a
satisfactory MOU, the United States indicated it would proceed at its own
expense with the NATO design, share the results of these studies with all
engaged nations (with costs to be reimbursed only by those engaged nations
which later signed the Memorandum of Understanding), and to conduct all
aspects of the design development, contract definitization and management in
cooperation with the engaged nations. In November 1971, the United States
thus initiated Phase 1 of the lead ship design and construction stage program
with the award of a letter contract to Boeing.

E-6

Chapter 10

Commencing with the October 1971 meeting, it was intended that Project Group 6
would have three principal tasks: to provide overall guidance, to establish
an organization to manage the acquisition process, and to define and develop a
technically feasible, economically viable NATO Standard PHM ship system. H
Although a Steering Committee was only slated to assume the responsi bi 1 ity for
project direction from NATO Project Group 6 once the MOU had been formally
signed, with the signing of the second round of letters of intent by only the
governments of Italy and the Federal Republic of Germany in the fall 1971, it
was decided that a provisional Steering Committee be formed by the three
engaged nations as an autonomous sub-grouping of NATO PG-6 to guide the
project, exercise executive control over the provisional NATO Project Office,
and be responsible for the implementation of the design stage until the MOU
was signed (the prospective date for which had now slipped to early 1972).

The first provisional NATO Steering Committee meeting took place in
Washington, D.C. in January 1972.

Project Group 6 continued to meet into the fall of 1972, but soley as a
vehicle for keeping Canada, Denmark, the UK, and the other observer nations
informed so that they could later join the project if they eventually elected
to do so. By mid-1972 PG-6 observers included only Canada, Denmark, France,
The Netherlands, and the United Kingdom. Although only three governments had
decided to actively participate, future project membership was still not
restricted. In the spirit of NATO cooperation, an additional government could
join the project at any time following consultation among, and joint
negotiation with, the original three corraiii tted nations.

During early 1972 efforts were devoted to completion of the Feasibility Design
(completed in March 1972) and completion of a draft PHM MOU suitable for

E-7

Chapter 10

NATO Patrol Hydrofoil Missile (PHM) Project

®s

•o

•^r

r»

r*>

2 <

r~~

ratification. It became clear early in the year that signing of the MOU and
commitment of funds would not occur until some appreciable time after draft
MOU completion; hence, additional letters of intent, fully acknowledging the
specific design and cost schedule obligations being entered into were
requested by the United States. These were provided by the governments of
Italy and Federal Republic of Germany in April and May 1972, respecti vely.

In November 1972 the MOU for the design and development of two lead-ships was
belatedly signed.

b. Distribution of the Technical Data and Work Package among the Three

Nations

Having completed the feasibility study, Boeing^ was awarded the PHM-1 and
PHM-2 design and construction contract in February 1973 for $42 million. The
contract was awarded by the Naval Sea Systems Command, Washington, D.C. on
behalf of the three participating navies. These were to be USN ships, there-
fore Italy and the FRG shared only in the payment of non-recurring costs. At
this time the U.S. Navy planned a follow-on order of 28 additional hydrofoil
gunboats if evaluation trials proved successful, while the FRG was to procure
10 PHM's, primarily through license production, and Italy was to procure four
for its Navy, either off the U.S. line or through license production.

The FRG and Italy were to receive the technical data package (TDP) for the PHM
developed in the U.S. to meet their combined requirements . Total cost for the
lead-ship design and construction phase was eventually to come to $128.5
million. In addition to the $42 million dollar award to Boeing (later
escalated to $45 million) the balance of the $128.5 million in expenditures
went to costs of running the NATO Patrol Hydrofoil Project Office (NPHPO) in

E-8

Chapter 10

Washington, D.C., Government Furnished Equipment (GFE) and tooling, technical
support, and so forth.

National contributions for the funding of this phase through mid-1977 came to

u.s.

$85 million

FRG

$30 million

(withdrew mid-1977)

Italy

$13.5 million

(withdrew early 1974)

Italy and the FRG each received, royalty and restriction free, PHM lead-ship
technical data packages, complete as of the time of their respective
withdrawals. Neither country, though, received the series production TOP.

Though Boeing received the prime contract, European industry provided a
significant percentage of the subsystem of the PHM.

E-9

Chapter 10

3. Precursors of the PHM

a. Early Boeing IR&D Projects

Boeing's hydrofoil R&D effort dated back to August, 1959. This included an
investment by the Company of an estimated $100 million in R&D by the time the
NATO project was launched, as well as another $50 million since.

During that period the Company led the industry in moving the submerged foil
concept from experimental demonstrations on Lake Washington and Puget Sound to
operational systems deployed by the U.S, the Italian and the Royal Navy in the
South China Sea, the Mediterranean Sea, the North Sea, and the Caribbean Sea.
In the course of this work, the Company played a significant role in every
major U.S. Navy hydrofoil ship program, and has been the leader in hydrofoil
waterjet propulsion.

Research began in 1959 at Boeing, and in 1960 a hydroplane test craft with a
hull made principally of mahogany plywood was built. Designated the Hydro-
dynamic Test System (HTS) and nicknamed Aqua-Jet, the lobster-shaped craft had
two prows, each with a cockpit and instrument compartment. The open center
was used like a wind tunnel for preliminary hydrodynamic testing. In addition
to foils, the craft was used for antisubmarine warfare testing.

Boeing developed a second company-sponsored R&D hydrofoil in 1962, Little
Squirt. The three-ton wooden hulled boat was built to prove the feasibility
of waterjet propulsion concepts now used on all Boeing designed hydrofoils.

The craft's foil system was arranged in a conventional configuration,

E-10

Chapter 10

primarily to accommodate the installation of a single water jet pump. Although
the major contribution of Little Squirt has been in the area of waterjet
propulsion, during her years of service, she provided a number of important
answers with regard to hydrodynami cs , structure and foil borne control. For
example. Little Squirt demonstrated the disadvantages of the "conventional"
foil arrangement under conditions of forward foil broach. In this condition,
the simultaneous requirements for roll control and foil depth control were
found to be impossible to satisfy with a ventilated forward foil, and violent
pi tch-roll-yaw motions characteristically resulted. The surface-piercing
trailing edge rudder on the aft strut was also shown to provide unreliable
directional control because of ventilation and lack of bow-down control area.
This experience contributed to the selection of the steerable forward strut
for directional control of Boeing hydrofoils.

Little Squirt was also used as a test bed for the development of a number of
systems, including the automatic control system and the trai 1 ing-edge concept
as a method of hydrodynamic control. The acoustic altimeter, mounted on the
bow, and flap controls have been used on all subsequent Boeing hydrofoils.
Little Squirt also demonstrated a 50-knot capability for hydrofoils.

b. The USN/Boeing PCH-I

In 1959 the US Navy received Congressional Approval to include in its 1960
Shipbuilding Program a hydrofoil craft suitable for carrying out anti-
submarine patrols. This was to be the U.S. Navy's first hydrofoil ship with a
ful ly-submerged foil.

E - 11

Chapter 10

From among the seven firms bidding, 13 a contract was awarded to the Boeing
Company in June I960 for construction of a patrol craft hydrofoil designated
the PCH-1. . The vessle was subsequently named High Point. Its design, by the
U.S. Navy Bureau of Ships, was based on the successful demonstration of a
fully submerged, automatically controlled foil of a small experimental craft
built in 1956, named Sea Legs. The Sea Legs was scaled up to the PCH-1 design
by the original naval architect, Gibbs & Cox. PCH-1 was detail designed and
constructed by Boeing at facilities leased from the J.M. Martinough
Shipbuilding Corporation in Tacoma, Washington. The ship was delivered to
the USN in 1963.

The High Point is 115 feet long, has a beam of 31 ft and displaces 110 tons.
The power plant consists of two Rolls-Royce Proteus marine gas turbines, each
delivering 3,000 shp. In the "flying" mode, speeds up to 60 knots have been
achieved. The vessel has accommodations for a crew of 13 and currently
carries, for experimental purposes, sonar and radar equipment.

An extensive test program with this vessel furnished the first experience with
a submerged foil system in all speed regimes. As expected, many technical
difficulties, especially in the hydrodynamic field, were encountered.

After the ship passed acceptance trials and was delivered to the U.S. Navy in
September 1963, it went into a trials program. As first configured. High
Point experienced directional stability and control problems both in calm
water and in rough water. These problems included directional divergences and
erratic response to the helm.

E- 12

Chapter 10

The principal lessons that were learned with regard to directional problems
were:

Exclusive use of banked turns is mandatory;

Yaw rate feedback to the rudder is mandatory;

Good directional stability under adverse conditions of relative strut immer-
sion in waves is mandatory, and;

A fully steerable forward strut is mandatory.

In the early rough water trials, the High Point also experienced pitch-heave
motion problems. Computer studies revealed that while a wide range of possibil-
ities exist for satisfactory automatic control under calm water conditions,
successful operation in heavy seas can only be accomplished with very special-
ized control techniques. It was found that the controlled dynamic response of
the ship must be carefully tailored with respect to wave encounter frequency
if the full seaway potential of the ship is to be realized. It was also found
that the occurrences of foil broaching could be minimized by accepting wave
cresting of the hull in seas of wave height in excess of forward strut length.

The application of these studies has subsequently permitted High point to operate
successfully in significant waves in excess of 4 meters, well above her speci-
fied design requirement for operation in 3 meter significant waves.

The ship completed a series of R&0 trials in 1971 prior to layup for major
modification in accord with design changes conceived by Boeing. This major
modification, completed in 1973, incorporated many of the technology advances
proven by a later USN/Boeing hydrofoil, the PGH-2 Tucumcari, For example, the
modified PCH-1 was outfitted with a fully steerable forward strut, dihedral

E-13

Chapter 10

after foils and a new automatic control system of Boeing design. In addition,
some of the hydrodynamic deficiencies of the propulsion pod arrangement were
corrected by a reconfiguration of the aft foil /strut/pod system.

Chief among the problems encountered in the hydrodynamic field was cavitation.
Cavitation can occur in any object moving at high speed through the water.

Vapor cavities form on the upper side of the foil. These are not stable but
oscillate rapidly in such a manner that water particles impinge with consider-
able force on the foil surface, quickly eroding the toughest metal. The serious
ness of the cavitation problem may be judged by the fact that the original
propellers of the High Point had a life expectancy of only two hours at 45
knots. 14

The High Point, however, was built to study just such phenomena and a variety
of newly designed propellers and erosion-resistant materials to cover the foils
and struts were tried. Although it was found that, through careful design,
many harmful cavitation-forming conditions can be avoided, they are difficult
to eliminate completely. Therefore, the water-jet propulsion approach, a design

which circumvents the propeller-cavitation problem entirely, has generally
prevailed over the propeller -driven ship for military purposes and was adopted
for all subsequent Boeing designed hydrofoils.^

The PCH-1 is currently based in Bremerton, Washington where it continues to
serve as a test platform.

E-14

Chapter 10

c. The USN/Boeinq FRESH I

In June 1961, the year following the PCH contract award, Boeing was awarded a
second USN contract for the design and construction of another experimental
hydrofoil, the Foil Research, Experimental, Supercavitating Hydrofoil (FRESH
I). The FRESH I was to serve as a research platform for experimenting with
foil and control systems. The FRESH I, launched in February 1963, was to have
had an ultimate speed capability of 100 knots and a required demonstrated cap-
ability of 80 knots. Although it never attained its speed objective of 100
knots, it still holds the hydrofoil speed record of 84 knots.

The FRESH I's greatest contribution was in the field of stability and control,
where it demonstrated the importance of directional and roll stability. It
was tested in two configurations - one foil forward, two foils aft (canard)
and two foils forward, one aft (conventional airplane). Propulsion was by a
single-aircraft turbofan. Its unique design allowed large variations in foil
location

and arrangement and the testing of a wide variety of foil configurations and
automatic controls.

The craft was fully instrumented and outfitted with an onboard data acquisition
system. The craft repeatedly demonstrated foilborne speed in excess of 80
knots on a foil system utilizing base-vented cambered parabolic sections arranged
both in a canard configuration and in a conventional configuration. At these
speeds, the highest yet attained by any hydrofoil craft, the foil system was
found to be structurally sound and free of hydroelastic problems. As predicted

E-15

Chapter 10

by foil model tests, the only cavitation experienced was stable non-erosive

leading-edge cavitation.

During final acceptance trails for the U.S. Navy on 18 July 1963; the craft
broached as a result of being mistrimmed* went into a divergent turn and over-
turned. Craft damage was limited to minor non-structural distortion and salt
water immersion effects. The craft subsequently was refurbished without basic
changes to the configuration, passed trials and was accepted by the Navy in
October 1964. As a result of this accident, it was learned that hydrofoils
must provide good directional stability under all reasonable conditions of
flying height and boat trim. This is directly reflected in the foil arrange-
ment and control system configuration of both Tucumcari and the PHM, which
provide good directional stability in the broached condition and directional
control in bow-down attitudes. The directional stability is achieved through
after-foil dihedral, and the dependable directional control is achieved with
the fully steerable forward strut.

d. AGEH

The technology developed with the FRESH I was originally scheduled for incorpora-
tion in the second phase of yet a third USN hydrofoil project, the 312 ton
AGEH Plainview designed by Grumman and built by Lockheed Shipbuilding and Con-
struction Company in Seattle, Washington. The AGEH had a maximum speed of 50
knots with a provision for conversion to 100 knots through incorporation of
FRESH I developments. Phase 2 of AGEH however, was cancelled.

E-16

Chapter 10

The 312 ton Plainview is currently the world's largest hydrofoil ship. The
Boeing Company has participated in the program since 1966, when the U.S. Navy
awarded the first of a series of contracts for control simulation studies.

These studies led to the identification and correction of a number of ship
control problems and have been a basis for automatic control system redesign
work by Boeing under later contracts. Boeing provided the contractor support
to the U.S. Navy for the maintenance, modification and operation of the ship
and played an active role in overhaul work. Boeing experience with this 312
ton ship provided valuable design knowledge for larger size hydrofoils. For
example, the serious hydraulic system problems of the AGEH can be attributed
to the developmental nature of the large hydraulic system required for foil-
borne control of variable incidence foils. This problem was avoided on the
PHM by a reduced hydraulic requirement due to the use of flap control, allowing
the use of proven available commercial aircraft hydraulic components.

e. The USN/Boeinq PGH-2 Tucumcari

In 1966, the USN proceeded with the next phase of its hydrofoil program with
the award of two fixed price contracts for the design, construction and trials
of 58-1/2 ton (60 ton when fueled up) experimental hydrofoil gunboats for test
and evaluation by the U.S. Navy. One contract went to Grumman for the vessel
designated PGH-1 Flagstaff, and the other to Boeing for the PGH-2 Tucumcari.

The two craft were completed in 1967 and delivered to the USN in 1968, where-
upon the each t ran si tted open ocean to San Diego to undergo operational evalua-
tion by the Naval Test and Evaluation Forces Pacific.

E-17

Chapter 10

1 .

l' I

, . .>(■'

;

- !',

,’V'J

i 1 .

• .

' l'h"*

• 1

' f| • 1

Source: Boeing ' PGH-2 Tucutncari

The two hydrofoil gunboats were to meet performance specifications presented
in a Circular of Requirements, each contractor being given complete freedom to
design the best vehicle to meet the following foilborne performance requirements

Maximum continuous speed in calm seas
Required turn radius in calm seas at 48 knots
Calm water range

Helmsman able, to hold heading in 2 meter significant
waves

48 knots
213 meters
classified

+5 degrees

Maximum vertical accelerations in 2 meter significant

waves (avg. 1/3 highest) 0.25 g's

Transit 400 nautical miles in rough water at average speed of 40 knots. 1?

Both craft underwent test and evaluation, but no production award ever followed
due to Viet Nam War related operational priorities.

Though the U.S. Navy only belatedly completed its formal source selection proc-
ess, following deployment to Vietnam^3 and Western Europe, the PGH-2 was evalu-
ated in the fall of 1971 as the superior design. With the completion of DSARC
I, the U.S. Navy fell in line with the Italian and German navies, and thus
cleared the way for the NATO project (the two allied navies having each pre-
viously selected the PGH-2 as the basis for derivatives and/or a follow-on
system) .

The PGH-2 incorporated design features introduced as a result of the Navy's
experience with High Point, key among these being:

- steerable strut and single-foil forward main foils aft (canard);

E-13

Chapter 10

- anhedral foil configuration;^

- gas turbine-driven water-jet propulsion;

- and an electronic/hydraulic control/actuation system.

The Tucumcari operated in seas up to seastate 6 which was well beyond its design
requirement. Moreover, the Tucumcari demonstrated that a properly designed
hydrofoil ship has maneuver capabilities far beyond those of conventional ships.
These capabilities are reflected not only in the ability to achieve high turn
rates in all sea conditions, but also in terms of unusually prompt response to
helm commands.

The P6H-2 came out ahead of the PGH-1 in the following areas:

reliability (the PGH-1 was only marginally seaworthy);
foil arrangements;

control system (e.g.,the PGH-2 was a much simpler system to operate, all
ship members could handle it, even the cook).

Furthermore the Tucumcari was on schedule while substantially exceeding perform-
ance requirements. The Flagstaff was some eight months behind schedule and
unable to meet its technical requirements (e.g. at 64 tons it was 15% over-
weight, whereas the Tucumcari met the spec exactly at 58.5 tons).

As for the critical (and still somewhat controversial) area of choice of propul-
sion systems, Grumnan had chosen a gear-driven super cavit at ing propeller system
for the PGH-1, and Boeing had selected a water-jet propulsion system for its

E-19

Chapter 10

Source: Boeing PGH-2 Tucumcari \

PGi-2. The water jet system proved itself to be the better system, but there
were a number of drawbacks, and some quarters of the U.S. N. had trouble recon-
ciling themselves. The water-jet avoided the supercavitation problem altogether,
had fewer mechanical problems, was less costly to manufacture, and had a sub-
stantially better record in the area of reliability and maintainabi lity.20 The
drawbacks of the water-jet propulsion approach, in comparison with that of the
propeller, were that it consumed 15%-1 7% more fuel and accelerated more slowly.

f . The Boei ng-Itali an P-420 Spaviero and the P-421 Nibbio Class of Mi litary

Hydrofoils: Italian Navy's Derivative of the Tucumcari

(1. ) Boeing Establishes Alinavi in Italy in 1968 and is Awarded the P-420
Spaviero Contract in 1969. In the meantime, unable to obtain USN interest in
a PGH-2 production run, Boeing had decided to look elsewhere for a customer
and partners to justify further capital investment. This they had found in
Italy. In 1968 Boeing established a joint venture in Italy, Alinavi, to market,
develop and produce a derivative of its PGH-2 Tucumcari under license from
Boeing. Alinavi ownership was originally distributed as follows:

Boei ng 60%

Istituto per la R icostruzi one Industriale (IRI) 30%

Rodriquez 10%

IRI is a holding company for Italian government owned firms, while Rodriquez
is a privately owned Italian firm which had produced many surf ace- pi ercing
commercial hydrofoils under license to Supramar.

E-20

Chapter 10

Source: Boeing P-420 Spaviero

An engineering development contract was awarded to Alinavi by the Italian
government in 1969, one which led to the constructi on of -a lead-ship based on
the PGH-2 Tucumcari , the P-420 Spaviero (the Seahawk, or more commonly known
in the U.S. as the Swordfish) military hydrofoil. The ship was built and
tested at the 0T0 Mel ara facility in La Spezia, Italy. A Boeing team headed
up by Harold Turner and fluctuating between 3 and 5 people was located at La
Spezia to provide technical assistance on ship design. The Spaviero was
launched in May 1973.

(2.) A Comparison of the Spaviero with the Tucumcari. The Italian Navy
Spaviero is basically the same ship as the U.S.N's Tucumcari, slightly modi-
fied for a much more sophisticated weapons suit. * More or less in line with
Boeing's original share of Alinavi ownership, there is about a 60% comnonality
between the Tucumcari and its Alinavi derivative, the Spaviero.

The Spaviero' s foil is identical to that of the Tucumcari, and the hull,
struts and autopilot are only slightly modified. Even though its hull is only
a little wider than that of the Tucumcari, it has a completely different
superstructure. The Spaviero has a range of 450 nautical miles at its maximum
speed of 50 knots.

The major difference between the 58.5 ton Tucumcari and the 62-ton Spaviero,
stems from the latter's armaments. The Tucumcari, as a one of a kind
prototype built to evaluate major advances in ship design, was only lightly
armed. It was equipped with one manually controlled 40 mm gun forward, two 50
cal iber

E-21

Chapter 10

Spaviero derivative was designed, utilizing a proven ship design, to serve as
a replacement for the Italian Navy's conventional fast patrol boats (FPBs).

As such, it had to mount armament typical of the most modern FPBs — i.e. an
automatic dual-purpose gun forward, a fire control system, and surface-to-
surface missiles aft.

Early studies considered several different gun-missile combinations, with a
design-goal weight of 11.3 tons for the weapons suit, and a ship displacement
of 59.5 tons. The Italian Navy's final choice specified an 0T0 Mel ara 76 mm
Compact gun forward, the same gun later chosen for the NATO PHM. The gun was
controlled by an Elettroni ca San Giorgio ( ELSAG) NA 10 mod 1 fire control syste
The anti-ship missile chosen for the Spaviero was Otomat.21

This final selection resulted in a weapons suit weight of 14.3 tons, 3 tons
over the 11.3 tons originally specified. It was this that necessitated a total
redesign of the superstructure and a widening of the hull by 3.5 feet. 22

Other less apparent, but significant, differences between the two craft are
the Spaviero' s lighter 400 Hz electrical power system versus Tucumcari's 60 Hz
system, and the more efficient dies el -powered steerable- re tractable propeller
outdrive for hull borne propulsion (as compared with Tucumcari's waterjet system
serving for both hull-borne and foil-borne propulsion.) The main pump and the
SEPA stabilization system are also of Italian origin. The Spaviero' s Rolls
Royce Proteus gas turbine engine has several hundred shp more than that of the
Tucumcari .23

E-22

Chapter 10

(3.) Performance Testing. The year following the Spaviero's launching in
May 1973 was spent in final outfitting, normal fir st-of-cl ass debugging, making
modifications and improvements shown desirable during testing, and undergoing
customer acceptance trials.

Performance testing conclusively demonstrated the Spaviero's outstanding speed
and good range capabilities, even with relatively heavy armament. In the process,
Boeing-Alinavi hydrofoil technology was shown to be mature, as seen by the
close correlation of predicted and actual performance, even after a signifi-
cant change in armament following contract signature. Finally, actual perform-
ance revealed good growth potential for the craft .24

( 4. ) Operational and Maintenance Savings in Comparison with Conventional
FPB's. The economics of operating and maintaining Spaviero and the P-421 class
of hydrofoil are especially impressive, both in comparison with conventional
fast attack craft and in consideration of the technological advance represented
by the system.

Generally, in conventional FPB combat ships, the manning costs alone can add
up to as much as half the ship's total "life cost". The Spaviero on the other
hand, with its 10-man crew, requires only 25 to 40 percent of the crew (25 to
40 men) typically associated with conventional FPBs carrying similar armament.
Manning cost are thus drastically reduced.

Another area of potentially significant savings is in fuel. The Spaviero has
only one Proteus gas turbine engine, developing a maximum of 4500 shp. This

E-23

Chapter 10

gives the craft a range of 360 nautical miles at 45 knots, during which time
about 8 tons of fuel are burned. A conventional FPB, such as the Combattante
II, has three times the installed horsepower, and will burn three times the
fuel (approximately 25 tons) to travel the same distance, and at a speed of
only 30 knots. 25

Maintenance is best considered by discussing those major components of a hydro-
foil which differ significantly from the corresponding components of a conven-
tional craft: i.e., the structure, including foils and struts; the flight
control system; and the foil borne propulsion system. Other components of the
hydrofoil are for the most part similar or identical to the correspond!' ng com-
ponents of conventional craft, and therefore maintenance is similar. 25

The foils and struts are made of corros ion-res istant stainless steel. The
only maintenance consists of periodic replacement of flap bearings and, if the
client so desires, repainting of the struts for aesthetic reasons.

The flight control system comprises two basic el ements: the electronic portion
represented by the automatic control system; and the hydraulic system with
associated mechanical linkages. The automatic control system consists of
hermeti cal ly seal ed solid-state components and, as such, requires no routine
maintenance. The hydraulic system consists of 3,000 psi components, many of
which have been proven in hundreds of thousands of hours of jet aircraft flight,
and which have been designed specifically to require low maintenance and provide
high reliability (after more than 30 months operation, the Tucumcari was
reported to have never experienced a flight malfunction) .27

E-24

Chapter 10

The Italian Military Requirement

1969-1983

c©

r>*

r->

The foilborne water- jet propulsion system consists of inlets, ducting, a- Rolls-
Royce Proteus gas turbine engine driving a large pump through a flexible cou-
pling, and nozzles. The maintenance requirements of the Proteus turbine (uti-
lized on both the PCH-1 High Point and the PGH-2 Tucumcari) are well known due
to its wide adoption by many of the world's navies, and need not be mentioned
here. The pump for its part is made up of exceptionally maintenance-free

components. 28

( 5. ) Series Production in Italy of the P-421 Nibbio Class Under License
to Boeing. In November 1974 Boeing opted out of its equity participation role
in Alinavi,, becoming simply a licensor. This was necessary for Alinavi to
qualify for the award of a follow-on contract from the Italian government.

Italy's new Ten-Year Military Program Law had been written so as to require
that any shipyard receiving a contract be fully Italian owned. Boeing and
Rodriquez sold their shares to the Italian government owned Cantieri Naval i
Riuniti of the Fincantieri Group (which also assumed those of I. R. I. ) along
with the right to build and sell the P-420 class of hydrofoil world- wide,
while retaining the rights to a royalty on all vessels sold. Through a
licensing agreement (Mode #1 of industrial collaboration) Boeing could still
assure itself a return on investment while avoiding the risk inherent in equity
participation. In 1930 Alinavi ceased to exist, being fully absorbed by Cantieri
Naval i Riuniti (CNR).

Having dropped out of the NATO program in late 1974 for what was to have been
the PGH-2 follow-on vessel (and one derived from a military requirement
generated by NATO* s AFSouth Command in Naples, Italy) the Italian government

E-25

Chapter 10

committed itself instead, in 1977, to series production of the smaller military
hydrofoil. CNR is now building six additional P-421 class hydrofoils for the

Italian Navy in La Spezia. One was to be launched in 1979 and the remaining 5

in 1980 and 1981, at intervals of four months. The first unit for series pro-
duction, the P-421 Nibbio, began sea trials in late 1980. of the spring of
1983 five of the ships had been launched with the sixth one scheduled for later
in the year. Foreign sales had yet to materialize, but CNR was optimistic to
its chances of closing with several prospective customers in the near future.

Boeing received its first royalty payment from CNR in December 1980. The sin,

paid in Italian Lira came to around $600,000. The royalty to Boeing Marine

Systems for the first three series production ships will be 5.2% of the ship
sales price, jimping to 7.0% for all subsequent ships produced. For all
licensed parts production the royalty will be 5.2%. As would be expected in
any license production program, CNR is still procuring from Boeing Marine Systems
under an Umbrella Purchasing Agreement, a limited amount of hardware and techni-
cal assistance.

E - 26

Chapter 10

4. Boeing* s European Technical Marketing Activities

for a PGH-2 Follow-on System:

September 1969 to November 1971

Meanwhile, following shortly upon the successful landing of the contract from
the Italian Navy for construction in Italy of a Tucumcari derivative, the P-420
Spaviero military hydrofoil, Boeing began to weave a more ambitious web of
interrelationships that would lead to a NATO PHM program, for a Tucumcari follow-
on ship.

a. European Marketing Activity from September 1969 to September 1970
In September 1969, the Manager of the Boeing Marine Systems (BMS) Organization
within the Boeing Aerospace Company, Mr. A. M. Gonnella, was in Brussels to
support a presentation on military hydrofoils to the NATO Naval Armament Group's
(NNAG) permanent Information Exchange Group (IEG) on Ship Design, IEG #6, at
the request of Captain A1 Carrier of Op-72. Op-72 was responsible for the

U.S. Navy's international information exchange agreements.

The following month, also at the request of Op-72, Boeing's former Tucumcari
Program Manager, Gene Myers, gave a presentation to the French Navy. On the
same trip Myers also made a presentation to the German Navy, but this time at
the initiative of a Boeing consultant. General Hentz, Bundeswehr (ret.). The
principle German participant at this meeting was a civil servant, Mr. Von
Knobloch, the Bundesmarine1 s chief architect specializing in hydrofoil s.^9

E-27

Chapter 10

In November, Myers was back in Brussels for the next NNAG IEG 6 meeting, which
had since set up a provisional sub-grouping Special Working Group (SWG) on
Small Missile Craft. This SWG was also numbered 6, but for a different reason.
This was the sixth such provisional SWG set up by the NNAG. A second presenta-
tion was given by the U.S. Navy, this time on a 'Double Tucumcari' design
( 928-33H), i ncorporating two Rolls Royce Proteus marine turbine engines. Later
the same month Chuck Slater of the Boeing Rome Office was up in Bergen, Norway
at a Fast Patrol Boat Conference. It was on this occasion that the interest
of the German Navy was first engendered, in the persons of a Captain Klose and
Commander Max Mueller of the Fuehrungsstab Marine (FueM, or the German Navy
General Staff). Klose later was to become head Sea Admiral for the German
Navy and Mueller was to run the German PHM Project office in Bonn. 30

In December 1969, Boeing provided a cost estimate on the 'Double Tucumcari' to
Captain Max Cooke of the OASD/ISA (Qp-723B ) , who transmitted it to the SWG -6
members during its January, 1970 meeting.

Following up on the January meeting of NATO's SWG-6 in Brussels, Myers held
technical discussions in Bonn with the Technical Division (DivT) of the German
MoO (Von Knobloch was again the principal German participant) and in Britain
with the British Navy and Yarrow Shipyard. The latter involved the first move
to interest European industry (in addition to governments) in participation in
Boei ngr s next generation military hydrofoil. Later the same month, came a
meeting with a senior British civil servant. Jack Daniels, Director of War
Ships for British Shipbuilding.-^

E-28

Chapter 10

In April 1970, Myers headed up a Boeing team that held further technical dis-
cussions in Bonn with the German MoD's DivT and in Bath with the British Navy.

In late summer, the USN committed itself to deployment of the Tucumeari to
Europe. This was a major program milestone for the PHM in that it showed the
USN was now committed to continuing its recently frozen hydrofoil efforts.

Capt. Larry Kelly succeeded in obtaining the support of the new Chief of Naval
Operations (CNO), Admiral Zumwalt for a limited European deployment of the
PGH-2. At a NATO SWG-6 meeting in Brussels in September 1970, the USN gave a
presentation of the PX(H) design, later renamed PHM. It was the same meeting
that the USN announced it would deploy the Tucumeari to Europe the following
spring.

In addition to supporting the NATO presentation in Brussels, later the same
month a Boeing team participated in another round of technical discussions
with the British Navy in London. 32

Meanwhile, discussions with the Germans had begun to rapidly pick up momentum
in lata spring and in May and June there was a further round of technical and
business discussions with DivT, FueM the Bundesamt fuer Wehrtechnik und
Beschaffung (BWB),33 ind the German technical support contractor Marinetechnik
Planungs-Gesellschaft (MTG) of Hamburg. In July 1970

Myers gave another presentation in Bonn to the FueM and DivT covering three
alternative designs each with a different engine: four Lycoming TF35C*s, one
G.E. LM 1500, and the 2 Rolls Royce Proteus. 3^ By this time, some skepticism

E-29

Chapter 10

was beginning to surface in the German Navy as to whether the NATO project
would ever get underway. Consequently, the Bundesmarine was beginning to con-
sider a national solution to its requirement.

b. The Bundesmarine Moves towards a Unilateral Solution to the Military

Requirement

The Bundesmarine plays an essential role in denying the Warsaw Pact quick and
easy dominance of the North Atlantic by performing several NATO assigned mis-
sions in the Baltic. Those missions for which the Bundesmarine was consider-
ing the adoption of a military hydrofoil to replace its conventional fast patrol
boats were:

Shadowing Major Combatants— Prior to hostilities, shadowing of major com-
batants, particularly large amphibious ships and heavy missile cruisers
is essential to ascertain intent, determine magnitude of the buildup, act
as a tripwire, be in a position to counterstrike the high value targets,
and transmit an attack warning if hostilities begin.

- Minefield Defense— As the Soviets have invested in several hundred mine-
sweepers, it is presumed that these ships would be in the vanguard of the
attack forces exiting the Baltic. Forces would be committed to counter
those minesweepers.

- Interdicting Amphibious Task Groups— 8y careful and deliberate target
selection, a mission kill on a task group can be achieved by a relatively
small number of effective surface combatants.

E-30

Chapter 10

In mid-1970 the Bundesmarine canceled, its own low-level four year effort for a
hydrofoil for Baltic Sea missions, realizing that it couldn't catch up with
Boeing.35 In August and September 1970, a Boeing team entered into discussions
at MTG directed toward the development of requirements for a new German hydrofoil,
designated by MTG as the Kleines Kampfboot (KKB ) -162 .

Boeing technical assistance to the Bundesmarine picked up again at the end of
1970 and continued through the first half of the following year. Once again
they were working with the Bundesmarine' s support contractor, MTG, in Hamburg.

In November a Boeing engineering team led by Dick Merritt was sent to
Wilhelmshaven in northern Germany to provide assistance to the Bundesmarine' s
Marine amt, in development of the German military requirement.35

c. Mari net echnik PI anunqs-Gesel 1 schaf t (MTG) mbH

When the Federal Republic of Germany began to rebuild its armed forces in the
mid-1950's, the original approach adopted involved the award of contracts for-
both design and development of warships to one contractor. By the mid-1960' s
it had become apparent to many that this approach to acquiring warships should
be changed. Contracting with a large number of shipbuilders to develop the
vessels was felt to have resulted in a less than adequate arrangement because
of the resultant coordination difficulties, especially with respect to weapon
systems integration. Moreover, following the conclusion of a program, some of
the shipbuilding companies frequently dissolved their design offices which led
to the loss of advanced know-how. Consequently, The German Ministry of Defense
directed industry to establish one private company to serve as the Bundesmarine' s
permanent planning and design center, working under contract to BWB on all FRG
naval shipbuilding programs.3?

E-31

Chapter 10

MARINETECHNXK

SHAREHOLDERS OF THE GROUP OF COMPANIES

Following the initiative of the Ministry of Defense, Marine-Schiffstechnik
PI anungs-Gesell schaf t (MSG) mbH was founded by five shipyards, whereas six
companies of the electronic industry founded the Marine-Elektronik Planungs-
Gesell schaf t (MEG) mbH. As a common instrument for all outside contacts, the
companies founded the Mari net echnik PI anungs-Gesell schaf t mbH.

The three companies started their operation in 1966 when the participating
industrial companies transferred experienced engineers to the new companies,
which formed the nucleus of the new engineering staff. 38

MSG (capital DM 300 000) is owned by the following five shipbuilding companies:
Blohm & Voss AG (40%), Howaldtswerke Hamburg AG (18%), Bremer Vulkan (18%),
Friedrich Luerssen Werft (15%), and Lubecker Maschinenbau AG (9%).

MEG (capital DM 300 000) is owned by Friedrich Krupp Atl'as-Elektronik, AEG/Tele
funken, N.V. Hollandse Signal apparaten. Standard Elektrik Lorenz AG, Siemens
AG, and Vereinigte Flugtechnische Werke GmbH (VFW), each holding a 1/6 share. 39

In 1972 a third company became a MTG shareholder, the Marine-Unterwasserregelan
lagen-Planungsgesell schaf t (MUG) mbH. This company had been founded in 1967
and is engaged in the field of underwater warfare.

All four companies have their offices in Hamburg, where they are located in
one building. Their work ties them closely together and they regard them-
selves as one unit.

E-32

Chapter 10

The Marinetechnik (MTG) group employes a total of 280 people. 200 of these
are engineers. All are experienced naval architects, electronics and weapons
people who are assigned to MTG by the shareholding companies.

Since Marinetechnik is working for the government and its shareholders are
competing among themselves, it is generally understood and agreed upon by all
parties involved, that the company must observe strict neutrality. Each employee
therefore has committed himself in writing not to forward any private informa-
tion he has received from any partner to any third party, without prior agree-
ment by the originator. Being a planning and design agency, Marinetechnik
has no interest in delivery of hardware. This provides some degree of assurance
that the company is able to minimize conflicts of interest.4^

The planning and design of all the Federal German Navy's surface ships has
since been entrusted to Marinetechnik. In the case of warships or other naval
weapon systems, Marinetechnik is the only industrial company to receive direct
contracts for the Preplanning and the Concept Phases. 4^

d. Germany's MTG and Boeing Team Up to Develop System Specifications for the

KKB-162 under Contract to the 3WB

In August 1970, Boeing was requested by the German MOO to offer a hydrofoil
boat design as an alternative to that of its own. Meeting in Hamburg at MTG
in late August, one of MTG's two co-directors, Hans -Joachim Fruendt, indicated
MTG's strong interest in becoming a subcontractor to Boeing for the German
program. This was part of a general effort by MTG to expand its clientele to
include industrial firms. The two Boeing representatives at the meeting.

E-33

Chapter 10

Dick Merritt of Boeing Seattle and W. W. Mueller of Boeing International Corpora-
tion (BIC) Bonn Office, expressed Boeing's interest in MTG's help, especially
in the areas of regulations and cooperation with the German Government, as
well as interpretation of military requirements.

Herr Fruendt suggested that MSG could assist Boeing during the proposal phase
not only by supplying information on German Navy Standards and Regulations and
equipment selection, but cooperate with Boeing on a purely technical basis, in
particular in the areas of: weight studies, compartmental.i zati on , ventilation,
noise and heat insulation, interior layout, power plant installation, electrical
wiring layout, and electrical power requirements.

The following month Boeing awarded a subcontract to MTG to assist in proposal
preparation in Seattle over a six week period. The technical assistance con-
tract was for:

a marine engineer familiar with outfitting, furnishing, and mechanical
subsystems;

- a logistics specialist familiar with manuals training, spares, and
the general logistics requirements of the Bundesmarine, and;

an electronics engineer familiar with weapon systems and electronics
integration.

E-34

Chapter 10

The MTG personnel also brought with them catalogues and other appropriate data
with which to assist Boeing in the selection of components and standards.

( 1 . ) Boeing offers its hydrofoil ship design, designated the Model 928-70.
The Boeing Model 928-70 design was for a 230-ton 36.3 meter submerged-foil
ship that was based on the much smaller Tucumcari, utilizing turbine powered
waterjet propulsion, and designed specifically for Bundesmarine and its NATO
assigned operational responsibilities in the Baltic Sea. In a slightly modified
form this Boeing/Bundesmarine design would eventually become that of the NATO/USN
PHM.

All major technical features of the ship design were derived from a proven
technology base. As with the Italian P-420 Spaviero, the ship configuration
had been established to incorporate an advanced combat system that was con-
sistent with the significant advance in the area of the weapon platform repre-
sented by the submerged-foil hydrofoil concept. As configured at that time
the weapons suit included a 7 6 -mm 0T0 Melara gun, four Exocet anti-ship missile
installations, the HSA WM-28/52 FCS,42 and two 20 mm guns.

The Boeing Model 928-70 was designed for the Bundesmarine for operation in the
Baltic Sea on an all-weather basis, i.e., in significant wave heights of 3
meters. Speeds of 50 knots could be maintained without exceeding the continuous
rating of the main turbine engine. The ship had a foil borne range well in
excess of 400 nautical miles. The turning diameter while foilborne at continuous
power was well below 500 meters, in heavy seas as well as in calm seas. The
ride qualities of the ship in terms of hull accelerations in heavy seas were

E-35

Chapter 10

comparable to those of conventional ships of far greater displacement. Hull-
borne, the Model 928-70 would provide the advantage of improving hullborne
seakeeping by extending the struts.

Boeing emphasized that its capability to design and construct the Model 928-70
for the Bundesmarine was the result of over ten years experience in pioneering
the development of submerged-foil hydrofoil ships. This experience encompassed
all of the major hydrofoil programs of the U.S. Navy previously covered in
Section 3 of this sub-chapter; the PCH-1 High Point, FRESH I, Plainview and
Tucumcari, as well as the privately developed HTS and Little Squirt. The high
performance design features of the Model 928-70 also permitted the application
of the aircraft experience of Boeing in addition to the ship construction
experience.

The specific design of the Model 928-70 hydrofoil ship involved a high-strength
all-welded aluminum hull with foils and struts of corrosion resistant high
strength steel. Foils and struts were configured to reduce to a minimum the
motions of the ship that result from the disturbed surface of the sea and from
the associated orbital motion of the water.

The turbine-powered water jet propulsion system utilized two dual-section centri
fugal pumps which were to be derived directly from the Tucumcari design. Elec-
trical power for the ship was to be supplied by a 115/200 volt 400 Hz system
that yielded major savings in equipment weights, consistent with the high per-
formance nature of the ship. Hydraulic power was to be provided by two identi-
cal aircraft-type hydraulic systems with provisions for automatic transfer of

E-36

Chapter 10

OUTBOARD PROFILE

critical loads in the event of damage to one system. Foil borne control of
the ship was to be accomplished by a full-time automatic control system that
required no attention on the part of the crew once takeoff has been completed.
This system provided attitude stabilization, automatic control of foil-depth,
automatic banking in turn maneuvers, and automatic alleviation of seaway
disturbances .

(2.) Development of the KKB-162 system specification under contract. In
preparing its proposal for the development of the KKB-162 Weapon System, it
had become clearly evident during November that the specifications governing
the Weapon System were lacking. The German government was demanding full
proof of performance. Consequently, Myers decided that it was necessary to
backup and reach a complete contractual definition first, prior to proceeding
with the developmental proposal.

With its Model 928-70 hydrofoil ship, Boeing had already completed five of the
seven subspecs for the 230 ton KKB-162 ship system specification in the area
of: hull structure; machinery (e.g. propulsion systems and power generation);
the electric plant; auxi liar y systems (e.g. environmental control systems and
fresh water system); and furnishings. However, Boeing lacked the data necessary
to complete the coimuni cation and control systems subspec or to even begin to
tackle the armament subspec.

In order to reach adequate contract definition for firm pricing and scheduling
of the entire Weapon System it was essential that Boeing develop KKB-162 Weapon
System specifications and baseline definition. MTG, with its background in

E -37

Chapter 10

The German Military Requirement

; 1970-1977

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preparation of similar data for the S-143 and the German Frigate Program, had
the capability and was a logical choice as a partner for developing this data.

Consequently, in a December 4, 1970 letter to MTG's Fruendt, Gene Myers made
MTG an offer. Myers proposed that the most expeditious way to prepare these
specifications would be for MTG, to undertake as a prime contractor the job of
Weapon System specification development. Boeing 'would provide technical assist
ance to MTG to insure definition of an integrated system including the hydro-
foil ship. Boeing's objective would be to develop a set of specifications
acceptable to both BwB and Boeing and thereby facilitate contract definition
and agreement. Boeing then would be ready to prepare a formal proposal for
development of the Weapon System as a separate response to the specifications
developed by this effort.

As a result of the proposal Boeing and MTG negotiated a technical assistance
agreement^ over the following month that resulted in MTG's award to Boeing of
a Cost plus fixed fee contract on January 11, 1971 for $133,805. The agreement
covered 94 man-weeks of technical support over a 14 week period extending from
January 11 and May 23, 1971. The work was to take place primarily in Hamburg
at MTG. Merritt was on-site manager in Wilhelmshaven of the Boeing technical
team, one fluctuating between three and five people over the first five months
of 1971.

More or less simultaneously, MTG was awarded a 1 million DM ($250,000) study
contract from the German MOD'S Procurement Agency, the Bundesamt fuer Wehr-
technik and Beschaffung (BWB), to develop specifications for the new KKB-162

E-38

Chapter 10

hydrofoil design. The total effort eventually performed under the MTG-BWB
contract came to 1,097,000 DM by the fall of 1970.

As previously pointed out, the KKB-162 specification was to evolve, after a

compromise with the USN later in 1971, into a slightly modified version which

became the NATQ/USN PHM design. In the words of Gene Myers:

Without the KKB-162 study, the background work would never have been
done that allowed the PHM to go forward. The KKB-162 study forced
the PHM in the direction that it finally took in size, speed, and
range.44

Upon completion of the KKB-162 contract definition study Boeing began prepara-
tion of its firm-fixed price proposal to the FRG for ten KKB-162 hydrofoil
ships, the first to be launched 28 months after contract award. However, these
efforts were abruptly terminated4- by a rapid succession of events, starting
the same month with the Tucumcari's deployment to Europe which shifted the
focus of the Bundesmarine away from a national solution and back to a NATO
one. This European deployment proved to be the needed catalyst which finally
lead to initial agreement on a larger NATO hydrofoil project.

e. The USN/Boeing PSH-2 Tucumcari is Deployed to Europe and the USN sponsors
the Launching of the NATO Project

Technical discussions continued in parallel between Boeing and the Bundesmarine
during January and March while the KKB-162 study was underway. March 1971
also saw another round of these discussions with the British Navy, and for the
first time, the Danish Navy.

Per the CN0*s approval the previous year, the USN* s Tucumcari was shipped across
the Atlantic from Norfolk, Virginia' on an 1ST for denonstrati ons in the FRG

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Chapter 10

and Denmark in April and May 1971. Boeing provided support for the deployment.

A special ad hoc meeting of NATO's SWG-6 was held aboard the Tucumcari during
one of these demonstrations in Denmark. The PGrl-2 Tucumcari 1 s performance was
impressive and succeeded in completing the process of locking the FRG in on
the PHG-2 Tucumcari based design. Grumman representati on in Brussels during
the NATO Project Group 6 deliberations ended shortly thereafter.

The Tucumcari demonstration at Olpenitz in the FRG made a good impression in
spite of an engine failure and bow door failures. Not all of the VIP's invited
made it even after the demonstrations were rescheduled three times, but those
that did ride the PGH-2 were enthusiastic. A large number of MTG personnel,
however, were able to ride Tucumcari because of these delays.^

Tucumcari demonstrations in the United Kingdom had fewer hitches with equipment
problems and were generally very successful. Joint operations with the Vospers
Tenacity fast patrol boat and. several air cushion vehicles showed that the
fully submerged hydrofoil was vastly superior in speed, comfort, noise level
and maneuverability.

As this was all going on, pressure began to build up for the FRG to release
its KKB-I62 study. It was understood that if the FRG was really serious about
influencing the U.S. in the "circular of requirements" for the NATO PHM program,
those specs had to be available to the PG-6 Group by mi d -summer .^7

After the demonstrations in Northern Europe the Tucumcari continued down the
Atlantic coast and traveled the length of the Mediterranean . Demonstrations

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Chapter 10

were given in Greece, Turkey and Italy. Upon completion the Tucumcari returned
to Italy where it was loaded back on the LST serving as its support ship, and
headed for Norfolk, Virginia.

As a result of these demonstrations, the Bundesmarine' s commitment to the
KKB-162 hydrofoil design based on a quadrupling of the Tucumcari, became rock
solid. Representative of this milestone, the MTG originated KKB-162 designa-
tion was replaced by a new designation provided by the Bundesmarine, $-162
('S' for Schnell boot). 48

In June 1971, NATO PG-6 met in London and the British, Canadian, U.S. , German,
and Italian navies began to move toward a concensus on a joint program based
on the Tucumcari. It was at this meeting that the U.S. N. committed itself to
building two PHM lead-ships if a design satisfactory to at least one other
NATO Navy could be arrived at. The Bundesmarine offered no official response
at the meeting, but U.S.N. personnel began to get the feeling from private
conversations that they would soon join.

It was during this period that Boeing, having signed an agreement with France's
Aerospatiale to produce under license the French surf ace-to-surf ace Exocet
naval missile earlier in 1971 (if they could sell the U.S.N. on it), made a
final attempt to get the French Navy interested in joining the hydrofoil project.
The idea was to tie the Exocet in with the PHM as a 'quid pro quo'. As it was
the French Navy never became seriously interested in the nascent NATO PHM
program, nor did the U.S. Navy adopt the Exocet (a sea-skimmer missile)

E-41

Chapter 10

preferring to proceed with their own McDonnell Douglas Harpoon project, the
missile that was later to equip the U.S. N. PHM's.^O

By June 1971 the USN had finally assumed the helm, taking over from the Bundes-
marine and Italy as the principal sponsor of a T ucuncari based follow-on system .
Though the USN had taken a leadership role in sponsoring NATO hydrofoil activi-
ties, up to this point it had been wedded to a Grumman PGH-1 based design.

This was the case even though other elements in the Pentagon had prevailed in
selecting the P(2H -2 Tucumcari (with its better record in the area of reli-
ability) for the European demonstration.

The Chief of Naval Operations (CNO), Admiral Zumwalt, made his support official
in August. The 0MB and GAO also became actively involved at this point, working
to support this effort by making sure that the joint program went smoothly,
especially with regards to stream- li ning the formal source selection process.
Both organizations supported the idea of a NATO project as good for both NATO,
and the U.S. image in particular. Worthy of note is that 0MB support came in
the person of Dr. James Schlesinger, shortly to become Secretary of Defense. 50
DSARC I was completed in November, 1971.51 On November 24, 1971, Boeing was
awarded a sole source contract for a feasibility design study by the Naval Sea
Systems Command in Washington, D.C., for $5.9 million.

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Chapter 10

5. Boeing as Entrepreneur!' al Coordinator for the

NATO Naval Armament Group (NNAG)

In parallel with the NATO activities in Brussels, throughout 1970 and 1971
Boeing was discussing advanced hydrofoil designs with several NATO navies,
each navy being presented technical data individually. The Boeing effort was
two pronged. The American, British, German, Danish and French, navies were
being approached by Seattle-based Boeing personnel. Al Smith and Joe Spontak
worked with the U.S.N. , and Gene Myers and Dick Merritt handled Northern Europe.
Myers and Merritt were assisted by General Hentz and Werner Mueller of Boeing's
Bonn Office. Boeing was working with the Italian Navy through its Rome office,
in the person of Chuck Slater, and its recently formed Italian affiliate, Alinavi
(60% Boei ng- owned ), in the person of Publio Magini. Alinavi was already under
contract to the Italian Navy to design and construct a modified version of the
USN/Boei ng PGH-2 Tucumcari , the P-420 Spaviero.

During this period, Boeing actively managed the flow of data to the interested
NATO navies. By the late spring of 1971 the German and Italian Navies had
been locked in on Boeing designed follow-on ships to the Tucuncari . The two
navies made it clear to the USN that if they were to participate in a joint
NATO miliary hydrofoil project, it would be for an enlarged version of the
Tucumcari. The USN came around shortly thereafter and definitively (if not
belatedly) selected the PGH-2 over the PGH-1.52

The dynamics of the Special Working Group 6 and the subsequent Project Group 6
meetings of 1970 and 1971 are particularly interesting. First, there was a

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Chapter 10

problem with regards to the importance of the agenda for each meeting. The US
Navy had some difficulty with the importance attached to a strict adherence to
the agenda by their European counterparts, and effectively working within it.
While the USN reps had greater latitude and could work towards the fulfillment
of policy objectives, the European representatives of the navies were highly
instructed, all decisions having been made independently prior to the joint
session and pre-recorded in considerable detai 1.53

In mid-1971, in an effort to up-grade the meetings and allow for more on-the-
spot decision making, the USN began to send a Rear Adniral to the PG-6 meetings.
The others followed suit, but this did not circunvent the agenda conflict.

The work and decision making for such meetings takes place elsewhere, in the
national capitals. The Brussels meetings were necessary to formally exchange
these national positions, and endorse any points of accord.

Secondly, the inter-Navy coordination work had to be accomplished early so as
to allow time for its digestion prior to the next NNAG Special Working Group
6/Project Group 6 meeting. The USN tried to handle this task itself, but
usually came in with too little, too late. With this in mind, Boeing in the
person of Gene Myers, assigned the role of entrepreneur! al coordinator. Myers
presented the supporting data and assisted in working out positions in detail
in the Northern European national capitals on a one-to-one basis prior to each
meeting. Though industrial representatives are not allowed to be present at
the meetings of NATO's CNAD , its Main Armament Groups (of which the NNAG is
one), or any of their sub-groupings, Myers presence in Brussels was critical.
This was because the exchange of views and data between governments was handled

E-44

Chapter 10

more effectively outside of the official meetings, away from the minute takers
This included social gatherings as well. A great deal of the Brussels work
for the NATO PHM was accomplished in this less formal environment, and here an
industrial rep such as Myers could participate effectively. 55

Thirdly, in the NATO SWG for Small Patrol Craft ( SWG-6) and later PG-6, each
representati ve from the larger nations came in supporting their own national
technical solutions, as one might expect. The British Navy supported two dif-
ferent concepts as represented by the Vospors planing boat and the SRN Hover-
craft, the French pushed their 200-ton Saphyre hydrofoil design, the Canadians
had a deHaviland hydrofoil design, the Germans originally supported their own
hydrofoil design, and later the Boeing Tucumcari based KKB-162, and the USN
promoted its PGH-1 and PGH-2 hydrofoils (with a bias toward the former).
Gradually as 1970 progressed, Boeing efforts in their respective capitals
suceeded in weening the German and British Navies away from their national
designs and over to Boeing's PSi-2-plus design. Even after this had occurred
though, these two navies continued for some time to give official support to
their national designs in the PG-6 meetings, while privately admitting, away
from the minute takers, that an advanced hydrofoil based on the Tucuncari was
the preferable option. Moreover, as previously mentioned, the German navy
terminated their own hydro-foil studies in the surnner of 1970 and placed a
six-month DM 1 million study contract with MTG and Boeing several months later
The 8ri tish Navy, unf ortunately , never found the funds to follow-up their
interest with anything more concrete. 55

E-45

Chapter 10

Among the most active navies in NATO's SWG-6, Exploratory Group 2, and PG-6,
the Italians were the one exception to this rule of each Navy pushing its own
national design. Having already opted uni laterally to go ahead with the con-
struction of a derivative of the Tucumcari, the Spaviero, they supported Boeing
designs for a follow-on ship based on the Tucumcari from the begining, even
before the USN. Of particular importance was the role played by one of the
Italian Navy's representatives at the SWG meetings, Publio Magini. Dr. Magini
was working as a consultant to the Italian Ministry of Industry. He also
happened to have been the President of the joint Boeing-Ital ian firm Alinavi
at this time. Unlike the other major allied nations, for NATO working groups,
Italy relies heavily on technical support contracted for from industry. This
is somewhat of a grey area as such firms are often partially (as was Alinavi),
or totally state-owned. As a matter of principle, the competing national
contractors are excluded from NATO meetings; NATO being, of course, an inter-
governmental body. Magini brought hydrofoil technical expertise to the
Italian delegation, in addition to greatly facilitating communications among
the U.S. and Italian Navies, and Boeing.

Magini ' s role in getting NATO to accept, first, hydrofoils, and
secondly, the Boeing design formula was crucial. His position
was ambiguous, being simultaneously Boeing's Corporate consult-
ant in Italy, President of Alinavi and a consultant to the
Italian Navy delegation. Because of his deep technical know-
ledge of Boeing hydrofoils, he was able to sell not only the
Italy delegation, but various other delegates on the Boeing
approach. He was able to understand what the individual and
national delegation positions really were, act as a catalyst in
arranging key meetings and, acting within ethical limits, keep
Boeing as informed as possible of what was really happening.

In short, Magini ' s contribution was invaluable. 5/

A fourth and final point interrelated with the above concerns the ever present
US - European conflict with regards to the business-government relationship

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Chapter 10

and competition policies. The European governments are inclined to work with
a designated contractor, whereas the U.S. Government must keep competition in
the picture for a more prolonged period during the early phases of the acqui-
sition process. In the case of the NATO PHM project, although the Boeing-USN
working relationship was a good one, it was evident that the USN felt much
more constrained in dealing with a potential contractor, than their German or
Italian. counterparts. Gene Myers found. that communication was often easier
with the German and Italian navies than his own, 58

Consequently, Boeing ended up selling its own navy on the merits of: 1) a PQH-
l/PGH-2 follow-on project; 2) the design ultimately selected and 3) one with
Boeing as the contractor— through the median of the two allied navies. In this
role of advocate, the Italian Navy played the predominant role up through the
completion of the German Navy's KKB-162 study contract with Boeing in mid-
1971. During the second half of 1971 both Navies were about equally
supportive, but during 1972, the German navy assumed the primary role in
negotiating with the U.S. Navy over the ultimate design of the PHM. The
Italian navy assumed a neutral posture during this period, remaining open to
whatever mix of the other two navies design preferences eventually
prevailed. 59

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Chapter 10

6. The Concept Definition Study Contract Award (November 1971) and

the Lead-ship Construction Contract Award (February 1973)

With the agreement in mid-1971 by the British, Canadian, German, Italian and
U.S. navies, upon the PGH-2 as the basis of a follow-on project, the repre-
sentatives within NNAG Project Group 6 began to oversee the negotiating of the
def initization of project management and funding arrangements amongst the engaged
nations. After several PG-6 meetings in the various allied capitals during
the surrener, the five engaged nations were able to take the next, step and sign
letters of intent.

In October, Captain Jim Wilkins (USN) was designated to be the Patrol Hydro-
foil Project Manager, and Gene Myers was selected to be the Boeing PHM Program
Manager.

a. Concept Definition Study (Phase I)

The sole source study contract was awarded by the USN on November 24, 1971,60
for a matrix design study which was to be Phase I of the NATO project.

The United States agreed to commence unilaterally with the design feasibility
studies necessary to establish a conmon baseline capable of meeting each of
the engaged nations (since reduced to three) specific operational requirements.
This did not involve a clean specification, but only a general statement of
work covering the ranges between the USN position of a 140 to 170-ton propeller
driven hydrofoil, and the German's 230-ton water- jet propelled hydrofoil design
which had in the interim received the designation of S-162.

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Chapter 10

The original USN position originated from in-house studies carried out by the
Naval Ship R&D Center (NSRDC) , a USN laboratory located near Washington, D.C.,
in Carter Rock Maryland.

The German position rested on the KKS-162 study carried out under contract by
MTG and Boeing in the first half of 1971. The U.S. Navy originally thought
that the Bundesmarine might be satisfied with a ship in the neighborhood of
180 tons, but Von Knobloch made it clear to Boeing's Bonn representative,
Mueller, in early July that the' FRG would join only if the U.S. agreed to the
German requirements. The FRG was in a particularly good position to influence
the outcome of this debate because of having the KKB-162 specification.

In July, 1971 a U.S.N. team visiting the FRG was presented with the results of
the KKB-162 by the MOD'S Armament Division with Von Knoblock presiding, and
was surprised at the detail and the overall work. The presentation tended to
disprove a number of the USN's assumptions on their 170 ton boat. Assumptions
for fuel consumption were particularly questionable. The Bundesmarine got the
impression that the USN was still using inputs from a Grumman design. USN
team was impressed and promised to send current data on the NATO boat design
for comments by Division T. A meeting with U.S. Navy to provide these comments
was agreed to for September. 61

The U.S. Navy ultimately swung over to a 230-ton water-jet propelled design
by early the following year. Meanwhile, Boeing had been exploring under con-
tract during 1972 all variables of the combination of the two designs. As the
study progressed the U.S.N. agreed that the 170-ton design had several major

E-49

Chapter 10

failings: it seriously understated the weapon suit payload, the electronics
required, and the range. Contributing to the compromise being one heavily
weighted toward the German position, was the German KKB-162 study having been
in much greater depth than that of the U.5.N. 's own in-house technical support
consultant, the NSRDC.62

The Italian Navy remained neutral throughout this process as the other two
navies attempted to reach a concensus. In spite of this position of neutral-
ity, Italy did continue to express its concern that the system was evolving in
a direction contrary to its concept of what was called for to fill its
requirement in the Mediterranean environment. The Italian concept emphasized
a small, highly maneuverable craft that could operate on a highly dispersed
basis in an inland sea. The idea was a low-cost, disposable system with mini-
mum complexity that could be utilized more as a pure weapon.

As the design began to stabilize on the larger ship originally envisioned by
the Bundesmarine, the Italian Navy saw itself assuming a share of the ever
greater technical risk and cost that went along with the increased sophistica-
tion, tonnage, and crew size.

Using the results of the common NATO design baseline, the effects of applying
the individual national variations were investigated parametrically by the
contractor. Upon completion of these studies in February 1972, a family of
designs which satisfied both the common and individual national require-ments
were presented to the provisional NATO Project Steering Committee^ fQr use -jn
selecting ship commonality characteristics for the NATO Standard PHM Baseline.

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Chapter 10

Final studies in March 1972 established the feasibility of adapting the Standard
FHM design to meet the requirements of each national variation.64

Project Engineering at Boeing spent most of the rest of 1972 investigating
various iterations of the detailed design, and supporting a series of preliminary
design reviews (PDRs). (At one point, mid-year, a smaller 140-ton design
resurfaced and had to be dealt with once again.) Meanwhile the NATO Offset
Plan Manager, Dick Merritt, explored various equipment options with the aim of
introducing as much German and Italian content as feasible into the ship design,
while NATO Weapon System Manager, A1 Smith, investigated national weapon system
requirements and alternative systems available (e.g. , for the FCS, systems
from the Dutch firm HSA, France's Thomson-CSF, and several Italian manufacturers.)

Phase 1 was completed in December 1972, culminating in a mutually agreed to
NATO Standard PHM contract design and the United States variation design. During
this phase, two significant documents, the Ship System Requirements and the
Ship System Description, were prepared. Together, these documents provided
the basis for establishing a contract design. The Ship System Requirements
document, expanded from the original NATO Circular of Requirements, contained
all the requirements the ship design had to satisfy. Additionally, it incor-
porated the feasibility design baseline resulting from the February 1972 pro-
visional Steering Committee meetings. The Ship System Description document
contained the description of the design as it had evolved from the periodic
design reviews. At the conclusion of the contract design phase in late 1972,
all major equipment to be included in the Standard Ship design had been selected,

. all subsystem configurations confirmed, and procurement of long lead equipment

£-51

Chapter 10

undertaken. Earlier allocations of space, weight, power, costs, and risks had
been verified and established. 65

b. The Hybrid Metric Design

Not only was the ultimate design heavily influenced by an allied navy, but
this was to be the U.S.N.'s first experience with a ship based primarily on
the metric system. The NATO PHM Ship Standard Design (i.e., that element of
the design common to participating navies) utilized a hybrid metric system for
weights and measures, i.e., metric except where selection of non-metric equip-
ment already existing and proven in a similar application was dictated by con-
siderations of cost, design tradeoffs, or balance of payments. In addition,
per the MOU, the design took into account industrial, commercial, and Govern-
mental material standards applicable in the Participating countries. Moreover,
in the interests of economical construction and mutual logistic support, NATO
Standardization Agreements (Stanags) were to be applied to the maximum extent
feasible. For NATO PHM Ship Variation Designs (i.e., the national peculiar
elements of the design) the system of weights and measures to be applied were
to be those selected by the Participating Government(s) on whose behalf any
such Design was ordered. 66

c. The NATO Project Management Organization Falls into Place

When the provisional NATO Patrol Hydrofoil Project Steering Committee (NPHPSC)
first met in Washington, D.C., in January 1972, it began to oversee the work
of formalizing the protocol between the three engaged NATO nations and their
attempts to arrive at a common design.

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Chapter 10

The second provisional NATO Steering Committee meeting took place in Seattle,
Washington, at Boeing's Plant II, in February, at which time additional letters
of intent (with caveats) were signed between the USN and its two allies, while
work continued on the definitive MOU for lead-ship construction. The third
meeting took place in the Federal Republic of Germany, in Bonn in April. All
three of these meetings were of one week duration.

The provisional NATO Steering Committee 1 s three National representatives were
Rear Admiral George Halverson for the USN (later replaced by Rear Admiral Bill
Reed) Herr Forndran for the FRG (later replaced by Herr Otte) and Admiral Ruzzier
for the Italian Navy .67

Sufficient progress had been made in stabilizing the requirement and agreement
on funding that by the time of the second Steering Committee meeting, the pace
of work picked up on the establishment of the provisional NATO Patrol Hydrof oi 1
Project Office (NPHPO) in Washington, O.C., at the Naval Sea Systems Comnand,
in late February 1972. During early 1972 the German and Italian staffers made
several visits of two to three weeks duration to the provisional NATO Project
Office. The NATO SPO was fully manned and opened in April.

With the establishment of the NPHPO in April, Boeing began to work exclusively
with the Project Office, instead of the three navies individually, though M^ers
continued to maintain excellent lines of communications with the three national
members of the provisional NATO Steering Committee. Captain Wilkins wore two
hats: one as Ship Acquisition Program Manager (SHAPM) for Project Management
Ships ( PMS)-391 , reporting up through NAVSHIPS to the Chief of Naval Materiel

E-53

Chapter 10

and then to the CNO; the other hat was that of NPHPO Manager reporting to the
NATO Steering Committee.88

The NPHPO was primarily manned by Americans and followed a matrix organization
(i.e. dependent on other elements of the Naval Sea Systems Command for specific
administrative or technical support). As previously mentioned, the USN provided
the Program Manager, Captain Jim Wilkins (replaced by Capt. Ed Molzan in November
1975) and one of three Deputy Program Managers, Commander Carl Duff (who also
wore two hats). The Germans and Italians each provided a Deputy Program Manager,
Sigfried Tympe69 ( FRG) and Capt. Marco Perlo (Italy). Mr. Tympe had a staff
of two Germans and Capt. Marco Perlo, one Italian. Each also served as head
of one functional area of responsibi 1 ity.70

Most meetings between the NATO Project Office and Boeing during 1972 took place
in Seattle, but one or two occurred in Washington, D.C.

While all this activity was taking place, NNAG Project Group 6 continued to
meet in Brussels and the national capitals as a vehicle for the three engaged
nations to keep the observer nations informed; Canada, Denmark, France, The
Netherlands, and the U.K. These meetings continued into the early fall of
1972 on an intermittent basis, but as none of the observers elected to join by
the end of one year in this status. Project Group 6 was dissolved.

As attempts to reach an accord among the three engaged navies dragged on, the
fourth Steering Committee meeting occurred in July and August 1972 in Seattle,
being in almost constant session through the summer. In early fall the last

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Chapter 10

PG— 6 meeting took place in Bonn. In November 1972 the MOU covering a joint
lead-ship design and construction program was finally signed, one year after
the USN had awarded the original feasibility study contract. The U.S. govern-
ment's assumption of the initiative and concommitant risk in the interim finally
paid off. In the opinion of the first Boeing Program Manager, Gene Myers, "If
we had waited for the MOU before going forward with the matrix design study,
the project probably would have never gotten off the ground. "71

The second phase was to provide the detailed design and construction of the
two United States variant lead ships and the delivery of a complete production
data package suitable for competitive procurement of ships by any of the partici
pating nations.

d. Interim Solutions are Found for Staffing and Funding as Signature of the

MOU Slips into 1972: the Case of the FRG.

The official statement, given to NATO PG-6 back in October 1971, said the FRG
would provide its share of funding for conducting feasibility and parametric
studies in the eventuality that the MOU was ever to be signed by the FRG.

This only covered the period through February 15th, however. Signing of the
MOU prior to that date would not have been feasible due to the lack of approval
at higher levels. In the understanding of the German representative in October
1971, the first time they would obtain knowledge on the funds to be committed,
would be in January or February 1972. The mandatory approval would then take
several additional weeks.

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Chapter 10

As things turned out though, when the new year rolled around agreement upon
and signature of an MOU was still not in sight. At the PG-6 meeting in Brussels
in mid-February 1972, the FRG representatives were asked to give a presenta-
tion on the status of their on-going efforts to find intermediate solutions
for staffing the Project office and funding the feasibility design study. 72

The FRG (as did Italy for that matter) still needed to know the technical solu-
tion of the standard design, prior to its making a decision as to whether it
would meet the Bundesmarine' s requirements or not. But it was also understood
that a NATO PHM Project Office could be established only after signing of the
MOU. As the signature of the MOU had continued to slip, it was recognized
that an intermediate solution was necesssary to enable the FRG (and Italy) to
participate directly in discussions and the decision making process between
U.S. Navy and Boeing Company vis-a-vis establishing the "feasibility design
baseline."

The FRG had assigned the following personnel to a delegation to perform this
task in January, 1972: Herr Von Knobloch, MoD, as head of the delegation;

Herr Tympe, 8WB, deputy naval architecture; Herr Smago, BWB, deputy weapons
and electronics; Herr Rossmann, general Office of the Navy; and Herr Burgmeister,
MTG's, deputy manager. A comparable team also arrived in D.C. from Italy.

The duration of this first stay in Washington, D.C. was three weeks from January
19 to February 10.73

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Chapter 10

During this first period' in which the German delegates were working at PMS 391
in Washington, D.C., they participated in discussions and decision-making, as
well ad working out different papers as recommendations to be forwarded to
higher levels within the German government for approval. In particular, they
worked on the final organization of the PHM Project Office, including detailed
job descriptions.74

In early 1972, in order to keep the international program moving, the FRG found
that it was expected to provide an additional commitment to PG-6 on its funding
intentions during the scheduled NATO meeting in Brussels of the week of February
14-18, covering the period from mid-February through the time the MQU was signed.
This they gave but only through May (at which point yet another commitment was
required) .

After the Brussels meeting of PG-6 the German delegation returned home. The
last week of February was taken up by meetings involving:

(1) Review and approval of the technical side of the Project (or elabora-
tion of reconmendations) using available data on the feasibility
design baseline, and;

(2) Review and approval of financial aspects of the project (design stage
only).

At the beginning of March the German delegation returned to Washington, D.C.

The second Interim period of work for the FRG delegation to PMS 391 lasted

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Chapter 10

throughout the month of March. After the delegations returned to the FRG at
the end of March, final agreement was reached on setting up the provisional
NATO project office in April.

e. Lead-ship Construction (Phase II) Begins

Phase II of the NATO project began the following winter with the Naval Sea
Systems Command's award of the Lead-ship construction contract to Boeing in
February 1973.

This was not without a last minute hitch, however. Though Phase I (the matrix
design and feasibility study) had resolved why the U.S. Navy had to go for a
larger water jet propelled ship (and the 140 ton design had in the meantime
resurfaced and been suppressed), the U.S. Navy and Boeing found themselves
having to rejustify the decision to accept the 230-ton water- jet design at
the last minute, prior to the conmencement of Phase II.

Later, in August 1973, Boeing received an RFQ from the Naval Sea Systems Command
for its first national variant work. It was for design, supply, and integra-
tion of the German PHM (S-162) Variant Ship Combat System. Though several
million dollars of national variant work was later to be done under contract
for the FRG over the life of the NATO project, no such effort was ever specifi-
cally contracted for in the case of Italy. As such, for Italy, national variant
weapon system specifications never got past the stage of container size and
weight.

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Chapter 10

f . Boeing Gets its Feet Wet with German Procurement Regulations

The August 1973 RFQ to Boeing for the German Variant Ship Combat System desig-
nated AEG Tel ef unken as the German subcontractor . In accordance with the Navy's
RFQ, Boeing and AEG jointly prepared a statanent of work for the Phase I (prelim-
inary design) proposal preparation effort. Following Boeing's placement of a
purchase order, AEG submitted a proposal in November for a little under DM 2
million.

Of interest is that, for the first time since the beginning of the KKB-162,
PHM/S-162 effort Boeing had to work through German procurenent regulations.

In particular, the offer was quoted under Verordnung fuer Oeff entl i ches
Preisrecht ( V OPR ) 30-53. The proposal used maximun cost price ( Sel bstkostener-
statungspreis mit Hoechstbegrenzung), that can be considered to be similar to
a cost plus percentage of cost type of contract which was, of course, illegal
under ASPR, But in another sense it corresponds to an undef initi zed fixed
price contract with a not to exceed price, be it one that is meant to stay in
the undef initi zed status for a prolonged period of time.

Per the German regulations, all audits and rate verification were carried out
by the BWB. Boeing received the BWB audit findings report on the proposal
prior to their own cost analysis. After endorsement and transmittal by NAVSEA,
BWB later determined all prices, rates, maximum allowable cost, as well as
indirect cost and compliance with VOPR generally. After negotiation of the
contract, early the following year, Boeing transmitted it via NAVSEA to BWB
for approval of the interim and ceiling cost price.

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7. The NATO Standard PHM Ship Design and

National Equipment Variations

It was recognized during the early stages of the ship acquisition process that
a single version of the PHM, for use by all nations, was not likely. However,
in order to ensure that the design, development, production, operation, and
support related economies flowing from standardization could be attained, it
was planned that the individual national PHM’s should have similar basic char-
acteristics. This objective was achieved by designing a standard PHM ship for
multinational use, yet retaining sufficient design flexibility to allow for
the individual variations of any country. 75

The variations were primarily equipment-oriented, particularly in the combat
systems. Nations were to be able acquire the standard PHM carrying the particu-
lar combat equipment compatible with their own national support systems.

The hull form and size and the major structural bulkheads and decks, foils and
struts, waterjets, pumps, controls, and main propulsion machinery in the ships
of each participating nation were to be identical, both in equipment and arrange
ment. Additionally, the auxiliary equipment and arrangements, deckhouse, and
personnel accommodations embodied a standard design. However, several varia-
tions in the latter were available to suit individual country manning
requirements.76

An important element of the matrix study involved the selection of major sub-
systems; an exercise laden with political overtones, as national preferences

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and the need to balance work sharing as much as possible among the three national
industries, played themselves out.

a. The Standard Tri-national Propulsion Systems

As stated above the main propulsion machinery is standard to all national vari-
ants of the PHM. It also included major work shares for the industries of all
three participating nations. The PHM propulsion plant consists of two independ-
ent systems, separated from each other by watertight boundaries. The hull-
borne system consists of two water jet pumps, each driven by a Mercedes-Benz
(later MTU) 8V331TC80 di esel engine. The f oi Iborne system consists of a single
waterjet pump driven through a power-splitting reduction gear by a General
Electric LM 2500 gas turbine engine. An advantage of this arrange-ment is
that the diesel provides economical, long-range cruising and close-in, slow-
speed, twin engine maneuvering while the relatively lightweight gas turbine is
immediately available for high-speed foil operation when required. Addition-
ally, the redundancy of this arrangement enhances ship survivability in peace-
time as well as wartime. The LM 2500 marine gas turbine is a 2-shaft, simple-
cycle, high- efficiency engine, developed from the GE TF39 aircraft jet engine
that powers the United States Air Force C-5A transport and McDonnell Douglas
DC -10. Extensive modifications have made it suitable to the marine environ-
ment, and it is being employed in several other major U.S. Navy ship classes.'7'7
The LM 2500 on the PHM is a derated variant of that used on the larger U.S. N.
ships and approximately one third of the content is Italian built.

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b. The Standard Italian Gun

Whereas the U.S.N. was exploring the introduction of two foreign systems into
its inventory on a large scale, the 0T0 Melara 76mm gun and the HSA fire
control system (FCS), in parallel for both the planned 30 ship buy of PHM's,
plus the FFG-7 frigates, the FRG was also looking at corrmonality considerations
The German Navy, however already had both systems in its inventory. The 0T0
Melara 76mm dual purpose gun was first introducted in the late-1960's in the
20 S-148 fast patrol boats. The fire control system (FCS)on the S -148 was a
Thomson-CSF Vega model. The 0T0 Melara gun was again adopted for the order of
ten S -143 fast patrol boats several years later. The S -143 was designed and
built by the AEG -Telefun ken and Luerssen team. For the S- 143 though, the HSA
WM/277^ FCS was chosen. The S -143 also carries torpedoes and Exocet anti-ship
missiles. The second batch of ten S- 143 A ' s that were later ordered in lieu of
S-162's were slightly different in that they had metal instead of wooden hulls,
only one 76 mm gun and greater anti-aircraft capabi lity .80

The Italian Navy had meanwhile also adopted the 0T0 Melara gun for its P-420
military hydrofoil, and several other surface combatants.

Not surpris ingl y, the Italian 0T0 Melara 76mm gun was the one eventually chosen
in 1972 to be the standard primary gun for the PHM. It satisfied the require-
ments of all participating national variations. It represents a significant
advance in lightweight, reliable design and performance over previous gun
systems available for hydrofoil application. Except for two ammunition loaders
the gun is unmanned and automatically controlled by the fire control system,
with the firing controls centralized at the weapons control console.

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The ship can be delivered with or without secondary guns. If specified, two
MK20 Rh 202 20mm AA guns can be provided, one each port and starboard, adjacent
to the fire cotrol antenna structure. In addition, spaces are also available
for pyrotechnics, small arms, and small arms ammunition. 81

c. The National Variant Fire Control systems

The heart of the standard command, surveillance, and weapons control suit for
both the German and U.S. variants is the WM-28 Radar and Weapon Control System
developed by N.V. Hollandse Signallapparaten of the Netherlands (or its
Americanized version, the MK 92). The WM/28 is a solid state system that offers
one radar dish to do two jobs, both scanning and tracking. This fire control
system embodies a combined fire control and search antenna system, mounted on
a single stabilized platform and enclosed in a fibreglass radome. The system
has a minimum surveillance range suitable for close range, precise navigation
and a- maximum range compatible with the employment of the ship's weapon suit
to its full capabil ity.82

Whether a common fire control system would have been established for all parti ci
pating nations was never definitively determined. Other modern fire control
systems can be installed such as the ARGO system, one of several considered by

Italy for adoption.

It was actually the WM/25 that had orignally been considered by the USN for
the PHM and FFG-7 program's but with the WM/28' s appearance, the USN adopted
the newer system. The HSA fire control system has evolved over the last two

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decades from the WM/2Q to: the WM/22 two of which were built under license by
Speery for the USN and a derivative of which was built in Canada as the WM/26;
the WM/25 which was originally considered for the PHM and interoperable with
the NATO Seasparrow SAM system (and mated to it for the Dutch, Belgian and
German Navies); and then finally the WM/28 which is now under construction in
the U.S., and again by Sperry, as the MK 92 FCS.83

The essential features of the WM/28 system are a compact integrated design,
resulting in minimum size and weight; extreme reliability, incorporating the
latest solid state techniques and the use of integrated circuits and minatur-
ized electronic components; simplicity in operation; and, most important, short
reaction time. These systems are particularly designed for use against surface-
to-surface missiles, air-to-surf ace missiles, aircraft, and surface targets of
all types as well as for direct or indirect bombardment of land targets. The
fire control antenna is normally controlled automatically by the digital computer,
but it can also be operated manually to search for targets if desired. When
radar range is not available, as for example, when engaging indirect shore
targets, target settings can be applied to the system manually from information
supplied by the ship's combat information center. This method can also be
used for ship targets in an emergency. 84

Once a target has been acquired, missile and gun orders are automatically gener-
ated by the general purpose digital computer. Firing is by manual controls
located on the weapons control consoles.

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d. The National Variant Missile Systems

Since the participating nations indicated preference for their individual
missile systems from the beginning, none has been designated or included in
the Standard Ship. However, the flexibility of the PHM design permits the
installation of a variety of surface-to-surface missile systems; including
either: the USN/McDonnell Douglas Harpoon; the French Aerospatiale Exocat
(chosen by the FRG) ; the Italian missiles, Otomat or Teseo; or any smaller
missile system. Space has been provided on the fantail to accommodate missile
launchers, port and starboard in parallel pairs, that are deck-fixed in eleva-
tion and azimuth. The space and weight allocation satisfied each presently
identified national requirement.^

All necessary equipment for guidance of the missile will be engineered in combi-
nation with the WM28/MK 92 system. The missile checkout, firing, and guidance
controls are centralized in the missile status and firing section of the weapons
console. It is to be noted that neither launcher crew nor shipboard mainte-
nance of missiles is required.

As the USN is the only nation to procure PHMs to date, the USN Harpoon is the
only missile currently in use on PHMs. The Harpoon is designed to fly itself,
homing in on radar beams that it bounces off the target ship. It flies low
over the waves to make it hard to hit, gains altitude just prior to reaching
the ship and drives a 500-pound warhead into the ship's vulnerable top decks.

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Chapter 10

8. Negotiation of the Design and Development

Memorandum of Understanding

U.S. objectives in promoting allied participation in the PHM project were:
reduce initial non-recurring costs to the U.S. involved in launching a project
based heavily on U.S. technology and targeted for adoption by allied navies;
obtain the downstream operational and economic advantages of standardization;
and indulge in a little image building for NATO and the U.S. (very laudible
aims). Now how does one get there given the numerous constraints?

First of all, in any such negotiation with potential partners, everyone is, at
least initially, trying to get the most while giving the least. The thorniest
problem to be faced during the MOU negotiations extending from mid 1971 to the
fall of 1972 was basically over the conditions that would be attached to the
release of the resultant technical data package (TOP).

Chief among these conditions would be work-sharing, i.e., the eventual arrange-
ments that would be worked out for the subsequent production phase (as the
developmental work sharing for this project would inevitably be unbalanced).

The basic dilemma was simply , how could the release of the TOP be tied to
conditions in the first design and development MOU, which inevitably had to
remain vague with regards to the eventual distribution of production, while
awaiting the completion of lead-ship development and the negotiation of a second
more precise production stage MOU. In short, how to gain and maintain voluntary
participation through balancing cost and benefits among all of the participants
over time while simultaneously managing a rational allocation of the available
resources to fulfill a common military requirement. No small feat.

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Chapter 10

Yet another ticklish aspect of the decision-making dynamics summarized above,
centered on the U.S. Navy's having to oversee the completion of a feasibility/
matrix design study that reflected a concensus among a fluid set of partners,
while avoiding seriously compromising the USN's ultimate determination of what
it individually needed. Meanwhile, U.S. funds were being committed and spent
covering the full cost of the design study {for eventual reimbursement if things
went as planned). Naturally the U.S.N. could not accept a system that did not
meet its requirements. As it turned out this didn't happen, though it could
have been a serious problem.

Another dilemna faced by U.S. Navy negotiators was that, it would be necessary
to separate the wheat from the chaff, i.e., identifying and negotiating with
those among the 'interested' nations that were in the end likely to make firm
com-mitments. Once a smaller grouping of engaged nations willing to make commit
ments was established, it could proceed with substantive negotiations. But
this had to be accomplished in a manner that would keep the interested nations
in the picture as observers as long as possible to avoid closing anyone out
prematurely when 'only a little more time and information was needed'. This
in turn suggests yet another issue, how much data actually needed to be dissemi-
nated in order to obtain and sustain this interest without compromising the
interests of the originators of the data and the program's momentum. This
naturally has to be accomplished with the full knowledge that most recipients
primarily are interested in information gathering.

Yet another consideration involves the timeliness of decision making and commit-
ments of each of the participating governments. The fumbling of any one of

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them can waste vital weeks or even months for the other participants who can
do little more than sit on their hands.

One last point closely interrelated with the previous one involves the multiple
actors and corresponding coordination activities and influences impacting the
national negotiating teams. The U.S.N. team had to coordinate with other com-
ponents within the DoD , especially the OASD/ISA, and with other Government
departments including the Treasury Department; and then there were the natural,
low-level blue-suiter pressures associated with international navy-to-navy
comraderi e and the small close-knit hydrof oiler club which included the U.S.
contractor. There were also those usual differences between the allied navies
vis-a-vis government- con tract or relations, involving, for example, the passing
on of information on the status of government- to- government negotiations, repre-
senting the interests of their own industries, and attendance at contractor
hosted social gatherings.

After the completion of the Tucumcari demonstration in Northern Europe the
prospects for a joint project rapidly improved. One month later, in June the
U.S. negotiating team was formed at the ins istance of the office of the Chief
of Naval Operations (CNO). The office of the CNO was responsible for all nego-
tiations with allied navies. For the PHM project the task fell to the Deputy
Chief of Naval Operations for Surface Warfare (OP -37), Admiral Halverson. OP-37
provided overall policy guidance through the heading up of U.S. representati on
to the NATO Project Group 6 and later to the Project Steering Committee.

Limiting its role to one of providing sponsorship and direction, OP-37 received
support at the working level in technical and acquisition matters from NAVSHIPS
(later consolidated with NAVORD (ordnance) into NAVSEA).

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Chapter 10

The NAVSHIPS Deputy Counsel for Procurement at the time was Mr. Peniel Moed,
who was brought in to provide legal support. Though nothing formal, as nego-
tiations progressed Mr. Moed's role gradually expanded from a procurement
support function to one of spokesman for U.S. positions in negotiating the
MOU. Later, once the MOU was signed, Mr. Moed continued to serve as (among
other responsibilities) Counsel to the Project Office up through December 1976.
Prior to leaving NAVSEA in 1976 Mr. Moed spent three additional years (early
1973 to early 1976) negotiating the never to be signed PHM Production Stage
Supplement to the MOU.

The first Project Group 6 meeting dealing with the prospective MOU for a joint
design study was held in London in June 14-16, 1971. The U.S.N immediately
assumed the lead in drafting the MOU. Following this meeting, Mr. Moed produced
the first of six draft agreements (the last of which was ultimately signed in
November 1972, thus becoming the MOU). All PG-6 countries intending to parti-
cipate had to submit written comments on the U.S. draft by July 15. After
this, the next milestone was August 2, when a one page letter of intent was
due from each country intending to commit resources. Following subsequent
meetings of PG-6, and then the project Steering Committee after January 1972,

Mr. Moed would re-draft the MOU, then circulate it within NAVSEA and OP -37,
and finally to the allied teams participating. Wording was generally not nego-
tiated at the table due to language problems. The negotiations tended to be
conceptual .

The U.S. Navy team used the NATO Seasparrow developmental stage MOU as the
principal model for the NATO PHM project. The carry-over from NATO Seasparrow

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was especially noticeable in the areas of the ultimate MOU dealing with patents
and technical data. But one could only go so far on this basis, since many
areas of the provisions were uniquely the product of the NATO Seasparrow nego-
tiations and were inapplicable to NATO PHM»

Through the summer of 1971 and into the fall, most nations on PG-6 gradually
dropped away as the U.S., the FRG and Italy reached a concensus on the basis
upon which a joint project would be launched. Letters of intent were signed
shortly thereafter. First the Portugese and Turks dropped out, joining the
French and Dutch in the status of observers, then the Canadians, Norwegians,

Danish and finally the British became observers. The last Navy to go in late
1971, the British, presented a particular challenge. It became increasingly
doubtful that they would aver be able to come up with the money to join, their
interest in the fine points of language and other details of the negotiations
continued. The intensity was there, but not the money. Detailed and binding
negotiations must be avoided until the serious players are on board.

Gene Myers, Boeing PHM Program Manager (November 1971 to August 1973), observing
these negotiations from the sidelines, felt strongly that, among all the observer
nations, it was the Danish Navy that had the most earnest interest in the project,
and came the closest to being the fourth participant.

As previously mentioned, the most difficult issue througout the negotiations
concerned the technical data package (TDP) and the conditions attached to its
eventual utilization by the Italians and Germans. There was a concern on the
part of the U.S. Navy that Italy might ultimately be forced to pull out without

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Chapter 10

ever building ships for its own use, after it had received the TOP. There was
a need to make a clear linkage between construction for a nation's own use,
i.e., for NATO purposes first, and then later maybe develop foreign sales as
an ancillary effort to help amortize non-recurring costs associated with the
set up of the specifically NATO production effort.

Including prior efforts in the area of hydrofoils, the U.S.N. was providing
100% of the original system unique technology^ while initially offering to
split the non-recurring costs of this project on an equal basis, i.e. 1/3 for
each nation. For the two European participants, the TDP for an extremely
unique and advanced system was to be made available on a royalty free-basis
(at least as far as their own ships were concerned) in return for a limited
investment. In order to attain U.S. Government objectives for the project,
i.e., procurement and deployment of the ships by as many NATO Navies as possi-
ble, it was important to structure the MOU so that the U.S.N. maintained
enough leverage to keep the allies on board after they started receiving the
evolving TDP. The final conditions agreed to are covered in the next section.
Simply put, if they procured one lead-ship in the U.S. and/or if they first
procured PHM's for their own navies, they could utilize the TDP sooner for
foreign sales.

The Italians found the conditions calling for procurement for their own Navy,
first, hard to swallow, though this was not a problem for the Germans. The
latter were less sales oriented. The building of one lead-ship in the U.S.
first was even more ticklish, again especially for the Italian Government.

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Chapter 10

The interests of the U.S. contractor, Boeing, had to be protected as well*
However Boeing's precise intentions were never known by the U.S. negotiators,
as it was felt that it would have been inappropriate to consult with them at
the time (contrary to the situation in the other two countries where there was
close coordination)— a yet unsolved dilemma for the U.S. Government in all such
interallied negotiations.

Another area where considerable time was eaten up was the definition of shared
and non-shared costs.

Here too, the original model was adopted from that of the NATO Seasparrow,
though they evolved differently. In the end it was simply impossible to antici-
pate all cost categories, and there were the inevitable querks for the ones
that were anticipated.

As the European involvement in such efforts has stronger political and less of
a technocratic overtone than for the U.S. participants, they had to be able to
justify how every cent would be spent for their own budgetary battles back
home. Of course in the end with the NATO PHM project, with the cost explosion
that begain in 1973, whichever way it was split, cost was not a nickle and
dime
issue.

Another delicate matter in such negotiations is the extent to which the observer
nations were to be kept informed. With the British, the Canadians, the Danes
and others on the side lines, i.e.» continuing to send observers to PG-6, it

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was always a question of how much they were entitled or needed to know. While
the three engaged nations wanted to keep the others interested, it had to be
made clear that their would be no free rides. A minor complication involved
France, who was an observer from the beginning on PG-6 (and therefore never
involved in the negotiations). At those formal PG-6 meetings where they were
present the French insisted on dual translation into French, as it was NATO's
other official language.

Another problem that arose during negotiations, was the turn-around time on
obtaining commitments. It took a substantially longer amount of time to get
signatures for Italy. 87

Inter- and intra-agency coordination problems also cropped up. For starters,
the general work-sharing formula for the design and development MOU was inten-
tionally vague, while the U.S. Navy and prime contractor were trying to line
up mutually acceptable work packages for the other governments, first for the
lead-ship component systems and later for license production. The U.S.N. and
the contractor were finding it rough going in comparison with work distribu-
tion on the NATO Seasparrow. At the time when the Navy finally felt that one
of its major lead-ship work packages, the 76(tto 0T0 Melara cannon was locked up
as an offset to Italy for the PHM, they discovered that through an oversight
the item had also been under negotiation with the Italian Government as an
offset in connection with an Italian purchase of another U.S. weapon system.

In a later case, during negotiations in 1974 and 1975 for the Production Stage
Supplement, another inter-agency offset problem appeared. Though satisfactory

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Chapter 10

production sharing and offset arrangements had been attained for the Italians
(even though they were to drop out later in 1974 for a mix of other reasons),
problems were still being encountered with the Germans. The Germans had
accepted that one lead-ship would be built in the U.S. However, German ship-
building was now in need of work and the German negotiator needed politically
acceptable answers for the Bundestag's Defense Committee. The FRG wanted the
ship on the U.S -German troop offset shopping list. This was a separate higher
level offset framework which was the domain of the U.S. Treasury Department
and the OASD/ISA. The U.S. negotiators resisted this proposal as being beyond
their authority.

Another problem area surfaced over provisions negotiated on establishing a
trust fund for which interest would be paid on payments made by the non-U. S.
participants until expenditures were made. Though not pleased with the
arrangement, the Treasury agreed to set up trust accounts because commitments
had already been made.

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Chapter 10

9. The Memorandum of Understanding (MOU)

a. The PHM Project and NATO

Quoting from Section I of the MOU:

The Signatory Governments (hereinafter referred to as the Participat-
ing Governments), as a result of exchanging views under the provisions
of North Atlantic Treaty Organization (NATO) Document C-M( 66)33 (2nd
Revised) of 8 January 1969 and the approval of the NATO Naval Armaments
Group (NNAG) of the recommendations of the NATO Project Group 6 (PG-6)
have decided to participate for defense purposes in a cooperative
project initially for the design and subsequently for the production
of a NATO Hydrofoil Fast Patrol Ship, Guided Missile (hereinafter
referred to as the "NATO PHM Ship").

The cooperative project is intended to proceed to two stages which
are the Design Stage and the Production Stage. This Memorandum and
its attached Schedule "A" and Annex I state the terms for the conduct
of the Design Stage and contains provisions with respect to the initia-
tion and conduct of the Production Stage. It is intended, however,
that commitments of Participating Governments to participate in the
Production Stage will be undertaken upon their respective evaluation,
approval and signature of a later Production Stage Supplement to
this Memorandum.

The Participating Governments will request the NATO Conference of
National Armaments Directors (CNAD) to endorse this cooperative proj-
ect as a "NATO Project."

In addition, as spelled out in Section VII of the MOU, the NATO Patrol Hydro-
foil Project Steering Committee (NPHPSC) was to provide, annually, a report of
the progress of the NATO Patrol Hydrofoil Project to the NATO Conference of
National Armaments Directors (CNAD). Supplementary information could be pro-
vided to other NATO member nations as may, during the course of the
cooperative project, be accorded the status of observer.

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Chapter 10

b. An Outline of the 40 page MOU

SECTION I - INTRODUCTION

SECTION II - OBJECTIVES AND SCHEDULE OF THE DESIGN STAGE

a. Objectives

b. Schedule

SECTION III - PERFORMANCE OF THE NATO PHM SHIP DESIGN

a. Definitions

b. Accomplishment of the NATO PHM Ship Standard Design

c. Accomplishment of the NATO PHM Ship Variation Designs

d. Measurement System

e. Acceptance of Ship Production Data Packages
SECTION IV - MANAGEMENT OF THE DESIGN STAGE

a. The NATO Patrol Hydrofoil Project Steering Committee
(NPHPSC)

b. NPHPSC - Rules and Chairmanship

c. NPHPSC Matters Requiring Unanimous Votes

d. NPHPSC Matters Requiring Majority Votes

e. Matters Pertaining to NATO PHM Ship Variation Designs

f . The NATO Patrol Hydrofoil Project Office (NPHPO)

g. Responsibilities of the Project Manager

SECTION V - FINANCE AND COMMITMENTS RELATING TO THE ACCOMPLISHMENT OF THE
NATO PHM SHIP DESIGN

a. NATO PHM Design Shared Costs

b. Methods of Sharing Design Shared Costs

c. NATO PHM Design Individual Costs

d. Revision and Updating of Cost Estimates

e. Arrangements for Financial Adjustments

f. Financial Records

g. Payments

h. Costs Incurred by the Government of the United States

of America Prior to Entry into Effect of this Memorandum
of Understanding

SECTION VI - THE PRODUCTION STAGE

a. Objectives

b. The Production Stage Supplement

c. Principles to be Reflected in the Production Stage
Supplement

d. Balance of Payments

e. Verification of NATO PHM Ship Production Data Packages

f. The Steering Committee

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Chapter 10

SECTION VII - REPORTS

SECTION VIII - EXCHANGE OF TECHNICAL INFORMATION AND USER RIGHTS

a. Definitions

b. Foreground Information-Disclosure

c. Foreground Information-Use

d. Background Information-Disclosure

e. Background Information-Use

f. Filing of Patent Applications

g. Protection of Owner's Rights

h. Proprietory and Manufacturing Rights

i. Delivery of NATO PHM Ship Production Data Packages and
Exercise of User Rights

j. Recoupment of Design Shared Costs

SECTION IX - VISITS TO ESTABLISHMENTS

SECTION X - PROVISION OF ADDITIONAL MATERIAL

SECTION XI - SECURITY

SECTION XII - SALES AND TRANSFERS

SECTION XIII - PARTICIPATION OF ADDITIONAL GOVERNMENTS

SECTION XIV - CONTRACT PROVISIONS RELATING TO THE ACCOMPLISHMENT OF THE
NATO PHM SHIP DESIGN

a. Placement of the Design Stage Prime Contract

b. Provisions to be Inserted in the Design Stage Prime
Contract

c. Requirements to be Included in the Design Stage Prime
Contract

d. Subcontract Assistance

e. Copies of Contracts

SECTION XV - TERMINATION OF PARTICIPATION IN THE DESIGN STAGE

a. Preface

b. Unilateral Termination of Participation in the Design
Stage

c. Multilateral Termination of the Design Stage

d. Rights and Licenses in Respect of Technical Information

e. Continuation of Work After Termination

f. Discontinuance of a NATO PHM Ship Variation Design

g. Security Measures

SECTION XVI - TAXES, DUTIES AND OTHER CHARGES

SECTION XVII - EFFECTIVE DATE OF THE MEMORANDUM OF UNDERSTANDING

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Chapter 10

ANNEX I - Circular of Requirements for System Design and Construction

Planning, of the NATO PHM dated 15 October 1971, (and 22 October
1971 NATO PG-6 Initial Revisions, 17 December 1971 NATO PG-6
Second Revisions).

SCHEDULE A - NATO PHM Design Shared Costs - Initial Estimates, Shares, and
" ' Payment Schedule

c. Organization

As spelled out in the MOU, a NATO Patrol Hydrofoil Project Steering Committee
(NPHPSC) was to be responsible for the implementation of the Design Stage withi
the terms of this Memorandum of Understanding. The NPHPSC was composed of one
member from each of the Participating Governments. Each member of the NPHPSC
was responsible for the necessary coordination with the appropriate authorities
of his own country.

The NPHPSC promulgated- its own rules consistent with the terms of this Memoran-
dum for the conduct of its business and the performance of its responsibilities
The chairman of the NPHPSC was to initially be the U.S. member with the proviso
that the NPHPSC would establish its own procedures for the selection of
successor chairmen.

Decisions of the NPHPSC on the subjects set forth below, per Section IV of the
MOU, were to be made by unanimous vote.

Questions concerning the allocation of costs between Shared and Indi-
vidual Costs for the design stage.

Questions concerning the allocation of costs as between NATO PHM
Design Costs (both Shared and Individual Costs) and NATO PHM (U.S.
Lead Ships) Construction Costs.

Approval of revised and updated Shared Design Costs Estimates.

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Chapter 10

Approval of revisions and supplements of the Circular of Requirements
insofar as they relate to, or substantially affect, elements of the
NATO PHM Ship Standard Design.

Approval of the Design Stage Prime Contract.

Approval and authorization of acceptance of the technical information
constituting the NATO PHM Ship Standard Design.

The numbers and specialties of staff personnel to be furnished by the
Participating Governments for service in the NATO Patrol Hydrofoil
Project Office.

Any other matters which are stated in an adopted rule of the NPHPSC as
requiring its unanimous decision.

All other decisions of the NPHPSC pertaining to the accomplishment of the Design
Stage were to be made by majority vote of all members.

The organization, mode of operation, duties and responsibilities of the Project
Office were established by the NPHPSC.

The NPHPSC established the NPHPO to serve as its executive staff. THe NPHPO
was to be headed by a Project Manager designated by the U.S. Government. The
NPHPO was to be located in the Washington, D.C. area. The NPHPO staff was to
be the minimum size recommended by the Project Manager, and approved by the
NPHPSC, to be necessary for successful administration and operation of the
Design Stage. The Participating Governments were to furnish staff personnel
for the NPHPO in the numbers and specialties recommended by the Project Manager
and unanimously approved by the NPHPSC.

The Project Manager was to be responsible for the management of the activities
of the Project Office, consistent with assignments and directions of the NPHPSC
and with the Memorandum of Understanding.

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d. Joint Funding Arrangements

Per Section V of the MOU, those costs which would be shared between the Partici-
pating Governments were:

The costs of work performed pursuant to the Design Stage Prime Contract
in order to accomplish the NATO PHM Ship Standard Design.

The costs of tests, trials, and evaluations conducted with any Lead
NATO PHM Ship or Ships for the primary purpose of demonstrating and
proving the NATO PHM Ship Standard Design.

The costs of operating the NATO Project Steering Committee and the
NATO Project Office.

The costs of maintaining clerical and secretarial staff of the NATO

Project Office.

The costs of certain work performed in Government operated or controlled
facilities as determined by the NPHPSC.

The Participating Governments shared the 'NATO PHM Design Shared Costs' on the
following basis:

The Design Shared Costs incurred for the accomplishment of Subphase I
(Preliminary Design) were to be equally shared; and

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Chapter 10

repgpniJi3S?^»l

The Design Shared Costs incurred for the accomplishment of Subphase II
(Production Design) will be shared as follows:

Twenty-five percent (25%) of the amounts of such Design Shared
Costs will be equally shared; and

- Seventy-five percent (75%) of such Design Shared Costs will be
shared pro rata on a 2:1:1 basis between the U.S., the FRG, and
Italy.

As the MOU further stated in Section V, it was intended that the Participating'
Governments' respective shares of Pro Rata Shared Costs would be redetermined
through mutual agreement of the Participating Governments. Such redetermina-
tion would be initially made on the fifth anniversary of the delivery of the
first NATO PHM Lead Ship of the U.S., and would be subsequently and definitively
made as of the tenth anniversary of such delivery. One of the factors to be
given weight in establishing such redetermined shares was to be the quantity
of NATO PHM ships and other naval combatant hydrofoil ships essentially similar
to the NATO PHM Ship Standard Design which have been delivered, are under con-
struction, or are under firm order as of the pertinent anniversary date by,
to, or for the individual Participating Governments for their respective defense
purposes and defense sales. Payments and refunds resulting from redetermina-
tions were thereafter to be effected between the Participating Governments as
soon as possible.

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Chapter 10

By way of a recovery of the NATO PHM Design Shared Costs, each Participating
Government is to arrange for the imposition of a levy on its defense sales
made prior to the date, specified in Section V, as of which the shares of pro
rata Shared Costs to be borne by each of the Participating Governments is to
be finally redetermined. The rate of such levy is to fixed by the NATO Project
Steering Committee prior to the completion of the Design Stage. All levies so
recovered would be divided among the Participating Governments at the time of
the redeterminations.

The NATO PHM Design Shared Costs did not include the following costs:

The costs of maintaining the individual members of the NATO Project
Steering Committee and the Participating Governments' personnel on the
NATO Project Office staff, including their communication and travel
costs.

The costs of the work required to be performed to accomplish each of
the NATO PHM Ship Variation Designs.

The provision of additional material.

The total costs for and relating to the construction of the NATO PHM
Lead Ships of the U.S., including the costs of installed equipments
and of construction administration. The foregoing costs were referred
to in this Memorandum as "NATO PHM (U.S. Lead Ships) Construction Costs,"
which were, except for the portion thereof which constitute NATO PHM
Design Shared Costs, to be borne entirely by the U.S.

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Chapter 10

Per Schedule A, attached to the MOU, Participating Governments' Shares of
Initial Estimate of Total NATO PHM Design Shared Costs were to be:

Federal Republic of Germany:
Subphase I
Subphase II

Italy:

Subphase I
Subphase II

United States of America:
Subphase I
Subphase II

Initial Estimate of Total -

$ 2,870,000

6,310,000

$ 9,180,000

$ 2,870,000

6,310,000

$ 9,180,000

$ 2,870,000

10,680,000

$13, 550, OOP89
$31,910,000

The Schedule of Payments by Participating Governments of Shares of Initial
Estimate of Total NATO PHM Design Shared Costs into the projects trust fund
was to be as follows:

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Chapter 10

PAYMENT DATE

FEDERAL REPUBLIC OF
GERMANY PAYMENTS

GOVERNMENT OF
ITALY PAYMENTS

UNITED STATES
OF AMERICA
PAYMENTS

First Payment

$6,690,000

$ 9,330,000

(see note 1)

31 July 1973

950,000

1,610,000

31 January 1974

1,230,000

2,090,000

31 July 1974

310,000

520,000

Totals

$9,180,000

$13,550,000

e. Work Sharing Arrangements

Although there were no fixed work-sharing objectives spelled out in either the
MOU or the NAVSHIPS contract to Boeing, the following work-sharing objectives for
the Design Stage were summarized in general terms in Section II of the MOU:

Utilize most effectively the military, industrial, scientific and
technical resources of the Participating countries, in terms of both
men and material in the interest of the cooperative project.

Maximize the scope of the NATO PHM Ship Standard Design, and of common-
ality of equipments and materials included therein, in order to in-
crease the opportunities for economical production and subsequent
coordinated logistic support for the Ships among the Participating
Governments in furtherance of their mutual defense.

Ensure that products of national industries of the Participating
Governments are given full and thorough consideration in the selec-
tion of equipments and material to be incorporated in the NATO PHM
Ship Standard Design and NATO PHM Ship Variation Designs. 90

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Consultations were to be held among the Participating Governments in order to
arrive at agreed terms for conducting the Production Stage. These terms were
to be set forth in a Production Stage Supplement to this Memorandum.

Per Section VI of the Design and Development MOU, each Participating Government
intended to have constructed in the U.S. at least one NATO PHM Ship.

As spelled out in the Design and Development MOU certain principles were to be
reflected in the terms of the later production stage MOU:

NATO PHM Lead Ships (other than PHM-1 and PHM-2) were to be placed by the
U.S. Government on behalf of, and with the advice and approval of, each
respective Government. These contracts were to be placed with the firm
which had performed the Design Stage Prime Contract unless any member of
the NPHPSC considered that negotiations had not resulted in acceptable
terms, in which case the Steering Committee would direct the Project Manager
to proceed with a competitive procurement.

The U.S. Government was to make available such inspection and construction
administration services at the respective construction sites in the U.S.
and would be reimbursed for such services in the amount to be agreed in
the Production Stage Supplement.

Each Production Participation Government would bear the entire cost fixed
in its NATO PHM Lead Ship Construction Contract and a portion of the costs
of conducting the Production Stage in a ratio to be established in the
Production Stage Supplement.

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Chapter 10

Balance of payments problems of the Production Participation Governments
were to be minimized by requiring the placement of contracts and purchases
among them in an agreed ratio which would equalize expenditures among these
countries to greatest extent feasible consistent with established ship
requirements. The ratios material and services to be supplied in further-
ance of Balance of Payments equalization were to be established later in
the Production Stage Supplement.

Under Section XVI of the MOU, duty-free entry was assured for all technical
documents and hardware into participating countries necessary for the accom-
plishment of the Design Stage of this project (except dues and taxes which are
no more than charges for services rendered).

The NATO PHM Ship Production Data Packages were to be promptly delivered to
the Participating Governments for informational purposes to enable necessary
preparation for national production to be commenced.

However rights of use of the contents of the NATO PHM Ship Production Data
Packages granted pursuant to this Section would be exercisable only under certai
stipulations.

Participating Government placing a NATO PHM Lead Ship Construction Contract
with the U.S. contractor could use it:

- For defense purposes - immediately after placement of the said
Contract.

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Chapter 10

For defense sales - three (3) years after delivery of the first NATO
PHM Lead Ship or one (1) year after delivery of that Participating
Government's NATO PHM Lead Ship pursuant to its NATO PHM Lead Ship
Construction Contract, whichever event occurs first.

While a Participating Government not placing a NATO PHM Lead Ship Construction
Contract with the U.S. contractor could make use of it:

For defense purposes - two (2) years after delivery of the first NATO
PHM Lead Ship.

For defense sales - five (5) years after delivery of the first NATO
PHM Lead Ship.

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Chapter 10

10. Disruption and the NATO Program's Collapse

a. Major Milestones: 1974-77

A 243.5 ton PHM-1 was launched* fully combat outfitted, in mid-1974. The
ship's weight had since increased by another 18.5 tons in an effort to make it
more producible and increase the fatigue life of the foils and struts. How-
ever, in August 1974, work was suspended on PHM-2 due to rising costs.

Later that year Italy, which had become increasingly uncomfortable over the
complexity and size of the system, was forced to drop out of the project.

This was due to not only the cost problems encountered on the program, but the
more immediate funding problems emanating from the oil crisis and the concern-
mi t ant drop in the value of the Lira.

Due to cost increases, in PY1975, the U.S.N.'s total long-lead planning fig-
ures reduced the program from 30 ships down to 24 ships while funding the con-
struction of first four production ships. In FY1976, with the post-Zumwal t
era setting in, the total for long-lead planning purposes dropped to six
ships, with funding again being provided for the four production ships* plus
completion of PHM-2.

After successful completion of Operational Evaluation (OPEVAL) in June 1976*
the Pegasus was returned to Seattle and commenced in September an eight month
major overhaul and OPEVAL deficiencies correction period. In early June, 1977
the ship conducted its Acceptance Trials, and was cited by the President, Board

E-88

Chapter 10

r-~

r»

of Inspection and Survey, for having presented one of the finest trials "in
the memory of the Board." The Pegasus was delivered on June 15, 1977, and
commissioned on July 9, 1977.91

On October 20, 1977, the Naval Sea Systems Command signed a fixed price
incentive contract with Boeing Marine Systems for five PHM production ships to
be delivered in Seattle between February 1981 and March 1982 . Meanwhi le- the
FRG had also withdrawn from the project. What happened?

b. Negotiation of the Production Supplement to the MOU
Well for starters, during 1973, after the lead-ship design and construction
MOU had been signed late in the previous year, negotiations on the Production
Supplement^ continued at a vigorous pace, but the time horizon began moving
out into the future.

As its urgency slipped, working on the Production Supplenent became more of an
obligatory exercise. But per the MOU, it had to be worked on. Starting in
1973, technical, cost and work sharing problens came to the fore. Cost, in
particular, began to alarm the Italians and Germans.

There was also considerable concern over the efforts to find adequate foreign
sources. As the cost and quantities of ships to be procured for each nation
were changing, where the ships were to be built and what the percentage of
their national content would be, took on added significance. The production
sharing issues became especially difficult.

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Chapter 10

Another issue that came into play involved configuration control.- How were
the three to maintain a standard ship design. This had been easy to gloss
over earlier, but once looking at production, this was clearly more difficult.
This in turn raised logistic support problems.

On the latter point, there were a number of briefings by NAMSA. Germans and
Italians did not strongly support utilization of NAMSA, but did generally favor
it. On the other hand, the U.S. Navy took a firm position on it being a less
rational approach than building-up on the existing U.S.N. system.

c. Cost Problems

The program began to incur serious cost growth problems starting in 1973.

First of all there were serious manning problems. Boeing's hydrofoil work
over the previous 12 years had been accomplished by a small core of hydrofoil
engineers working in an isolated skunk works atmosphere isolated from the highly
developed aerospace engineering and manufacturing system throughout this period.
When it came time to cash in on Boeing's pain stakingly acquired pre-eminence
in this aerospace frontier, Boeing had only 19 hydrofoil engineers available.
Given this limited base, following contract award the program began a rapid
build up to

200 engineers in the first two months of 1972.93 Exacerbating this problem,
Boeing had meanwhile decided to simultaneously launch its commercial Jetfoil
program. Three weeks into the PHM project, 10 of the 19 hydrofoil ers were
split off and assigned to the Jetfoil program. These people were thoroughly

E-90

Chapter 10

initiated into the occult world of hydrofoils, having won three of the five
contract awards made by the U.S.N. for experimental hydrofoil prototypes.

Here the first problems materialized and the ascent began toward ever acceler-
ating cost. The compounding rate for the NATO PHM engineering staff over the
two month period was 22 to 1. Overconfidence appears to have led to an ignoring
of the compounding rate problem.

Though the matrix design study phase I was completed within cost, latent plans
yet to be perform were to contribute in part to cost increases downstream.
Furthermore, the USN abandoned its original concept of an expendible or 'throw-
away' ship, in favor of one that was fully redundant. In the end, both Boeing
and NAVSEA were responsible for developing what in some quarters was felt to
be an over-specified system with excessive redundancy.

For its part, once it had placed the sole source contract, the U.S. Government
did not intervene when as the contractor's limited resources began to be diluted
by the simultaneous launching of the two hydrofoil programs. In hind-sight,
the U.S. Navy should have forced a recompetition, as they did with the NATO
Seasparrow project when an unacceptable proposal was generated by the sole
source U.S. lead contractor, Raytheon (Raytheon won the competition with 13
other U.S firms anyway, but the net result was a much tighter design and cost
proposal). Or the Navy should have at least put pressure on the PHM contractor
until the situation was rectified.

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Chapter 10

Moreover, given the U.S. defense contracting environment where competitive
pressures are being applied across the board for a number of projects, a defense
contractor’s priorities and resource allocation for a sole source proposal is
bound to be unfavorably impacted.

European management on the other hand, is used to operating in a sole source
environment where defense contractors are designated early-on (as the FRG and
Italy basically did with Boeing). This results in yet another example of the
difficulty of finding a good fit for any given defense project between the
differing European and U.S. approaches to source selection.

One additional problen contributing to redundancy and over complexity that was
reminiscent of the joint German-U.S. tank project, the MBT-7Q (1963-1970), was
that in certain areas of the design an either -or decision was never made where
the U.S. and German Navy positions were incompatible. Consequently, the Project
Office tended to keep both. This was particularly problematic in the area of
electrical power.

In any event, under Zumwalt (CNO from 1970-1974) the original concept was 3
PHM's for the price of one FFG-7 class frigate. The PHM/FFG-7 ratio, remained
at 3 PHM's for the cost of one FFG-7. However, with the PHM cost increase,
critics of the PHM (and the conceptual reorientation the system represented
for U.S. Navy thinking) in the DoD and Congress chose to focus on the trebling
of the cost in absolute terms.

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Chapter 10

d. Tergiversation within the U.S. Government

Subsequent to successful completion of OPEVAL in June 1976, another set of
problems began for the down scaled U.S.N. program. The project found itself
being subjected to frequent reviews at nearly all levels of the government.

These reviews involved such issues as technical risk assessment, component
design improvement, independent assessment of performance and operational utility
of the ship, production methodology, and cost. The Project Manager found him-
self having to deal with a series of nearly continuous reviews, each in turn
generating unpredictable decisions and impacting on the progress of the program.
These unprogrammed activities became increasingly serious during the spring of
1976, with Congressional committee action being taken to delete production PHM
ships from the FY 1977 budget. Strong Navy and DoD appeal action, however,
with the support of the Senate Appropriations Committee, resulted in Joint
Conference Committee action to restore the funds.

Throughout the fall of 1976 various reviews through the Navy and the DoO had
progressed to a favorable DSARC III decision by the end of the year, and
finally on January 10, 1977, the Deputy Secretary of Defense advised the
Secretary of the Navy that the PHM production could proceed.

However, ten days later on January 20, 1977, the Administration changed and
DoO priorities were reexamined. In February, 1977 the new President's FY 1978
budget revisions included language indicating deletion of the PHM's, and in
April, a memorandum from the Secretary of Defense, Harold Brown, confirmed
that decision. It appeared that the PHM project would finally follow the path
of the two previous German-American joint design and development projects, the

E-93

Chapter 10

MBT-70 and the AVS fighter. 95 once again the European stereotype of the U.S.
being an unreliable development partner was reinforced. In May, 1977, as
required by the Budget and Impoundment Control Act of 1974, the President sub-
mitted a recission proposal to the Congress. After the Defense Subconmittee
of the House Appropriations Committee held hearings on the subject on July,

12, the Subcommittee voted against the recission. With the Senate taking no
action at all, at the end of 45 days the administration was obliged to proceed
with the program.

Consequently, the Secretary of Defense released the appropriated funds and
placed the program back into an authorized mode, and Boeing received the $178
million award for the production of 5 PHM'sSS in October, 1977.97 By this
time the total award to Boeing for the five production series ships came to
$230 million. The six PHM's are all that remains of an originally planned
30-ship U.S. production run.

e. The FRG Withdraws

By the time Congress had completed its 1977 action refusing to rescind prior
year appropriated PHM funding, the FRG was no longer an active production
partner, and the dramatic unit cost reductions expected from a larger produc-
tion base were lost.

Meanwhile, the FRG still had been committed to buying 10 PHM's into mid-1977
(9 through licensed production), but the funds were never authorized by the
Bundestag. As stated in the June 1978 issue of Naval Engineers Journal,
entitled, ''The PHM— Surface Warfare Ship Technology Takes a Step Forward," by

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Chapter 10

Joseph N. Schrader and Cdr. Karl M. Duff, USN, "the decisions of the NATO
partners not to enter coproduction probably had no direct effect on the U.S.
program decision. However, an earlier positive decision on the part of either
of the other two design partners might have favorably influenced the U.S.
decision making process and the reverse would also have been true in the case
of an FRG decision. "58

In commenting further on the effects of the U.S. decision making process on
the NATO PHM program, Schrader and Duff wrote:

The sudden and extreme changes in the U.S. Government's position regarding
production of PHMs for the Navy has had a decidedly negative effect on the
continued program participation of the Federal Republic of Germany. As
early as Spring of 1976, with the tentative moves by the Congress to
delete four of the five production ships from the program, FRG
representatives emphasized the delicate nature of their own program
budgeting and decision making process and the importance of some positive
program projections by the U.S. Navy."

Although the United States did not enter into an active campaign to promote

German commitment into co-production, later restoration of the production

funding by the Congress in response to strong CNO and SEC-NAV positions in

support of PHM production appeared to sustain satisfactorily the concurrent

FRG program decision making process. However, with the announcement and

personal comnuni cation to the FRG in January-February 1977 by the new

Secretary of Defense, Harold Brown, that the United States was terminating its

PHM Program and abandoning any further interest in production of PHM ships,

the damage became essentially irreversible.

By the time Congress had salvaged the project, certain events had already been
set in motion on the other side of the Atlantic. The FRG decided instead to:

{

E-95

Chapter 10

procure 10 more of their own conventional ships, the S-143A;

terminate further participatory effort in the production design (which
came to another $70 million) and meant that the data package possessed by
the FRG is only that of the lead ship (the PHM-1 Pegasus) not that of the
USN production series PHM's and;

to bring home their Project Office per sonne 1.100

f . Commentary

The Congressional battle in favor of the PHM had been led in the House of
Representatives by Washington's Norm Dicks and in the Senate by the chairman
of the Senate Appropriations Committee, Washington Senator, Warren Magnuson.
Dicks went before the House Appropriations Committee in 1977 to urge Congress
to overturn President Carter's decision to cancel the boats. "As you know, I
have a somewhat parochial interest in this matter," he told his colleagues,
but then said, "I'm not here to defend the contractor or the increased cost of
this program."

Speaking some five years later, in March 1982, in regards to the Navy's not
having yet decided upon a mission for the six-ship PHM squadron. Congressman
Norm Dicks, said, "The Navy is resistant to change and is just being stubborn
about the hydrofoils." Dicks, a strong supporter of the hydrofoil program
said Congress may have to hold the Navy's "feet to the fire" to get it to try
other uses for the boats.

E-96

Chapter 10

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I think you'll see a turnaround on this. I am going to insist within the
Congress that these boats be used and we'll see to it that it gets done.
The njw Navy needs smaller, faster ships, and it may be forced to accept

Schrader and Duff added what they felt were two of the lessons learned offered
by the events of 1976 and 1977 related above.

If the PHM Program is typical, then it appears our NATO commitments and
objectives are very easily sacrificed whenever a perception arises that
national economic or political realities are altered. It requires
surprisingly few complications in the life of a program to make
partnership considerations expendable. These are facts which the naive
simply have to recognize— at all levels of government. 102

The importance of a strong, skilled, and dedicated Project Manager is
greater than ever. All of the processes of "upward" management depend
upon his strength and skill and are probably more vital and energy con-
suming than even his assigned "downward" management responsibilities. 103

According to Boeing's first PHM Program Manager, Gene Myers, "although

considerable pressure had been building up within the PRG to drop out at this

advanced stage, the Germans probably wouldn't have unless the U.S. had offered

them a face saving way out. The U.S. opened the door by procrastination."

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Chapter 10

11. Balancing the Industrial Side of the Equation and the Withering

of German Support

Boeing had tried to interest German industry in participating in lead ship
development during 1972-3, but with only limited success. With the boom in
commercial production and especially exports, Boeing had considerable difficulty
enlisting German interest in investment in such a military project, one with
only limited prospects for domestic and foreign sales. As broken down on pages
9 and 10 of this sub-chapter, about 17% of the lead ship was European produced
with the figure dropping to 7% for the U.S.N. series production FHM's (with
the balance of 10% produced in the U.S. under license).

A major example of this problem involved the German firm Zahnradfabrik (ZDF).
During source development for design and' construction, Boeing attempted in the
1972-3 timeframe to enlist ZDF for development of a major unique component,
the foil borne propulsion gear box for the PHM. ZDF however was not interested.
With its primary market being gear boxes for trucks and armored vehicles, (where
business was excellent) there was little or no interest in FHM work, where
there was no guarantee of a sizeable market developing. Moreover, up till the
mid-70 's German industry generally shunned defense contracting work as it was
viewed as unprofitable. In the end, Boeing had to develop and produce the
gear box itself for the lead-ship.

The German government for its part, was strongly interested in having the
Dutch firm Hollandse Signalapparaten (HSA) build its gun Fire Control System
(FCS) for all FHM's. This was to have been the major element of the German work

E-S8

Chapter 10

2820 BREMEN 70
P.O. BOX 70 00 30
TELEPHONE 0421 /66041
TELEX 02 44 484

FR. LURSSEN WERFT

FED. REPUBLIC OF GERMANY

DESIGNERS & BUILDERS
OF SOPHISTICATED
NAVAL CRAFT

package (though performed primarily in the Netherlands). The German government
was especially interested because of the comnonality of the PHM's FCS with
that of its ten $-143 Schnellboote already under construction (one of the reasons
for its consideration for the PHM in the first place). The USN however, nixed
this for its series production PHM's as a large segment of the PHM system, and
a critical subsystem at that, would have been built off-shore. Moreover, the
USN was exploring the possibility of adoption of the GFCS for wider use on
other Navy ships, a plan it was soon to carry out.l°5

Boeing continued to build up its joint program based on the NATO Seasparrow
experience while lead ship construction was underway. Boeing had already won
over the Italian and German governments which had contributed to the launch of
the lead ship program in the first place. Now to maintain support for the
program all the way through to series production their respective industries
had to be locked in. The lead ship contained Italian and German elements, but
the German side of the industrial equation was especially unbalanced. The
Seasparrow program as well, had only included about 10% European participation
during engineering development from three of the five participating European
navies, and had to rely primarily on production work to balance the work sharing

equation.

Therefore in late 1972, with the leadship construction program about to get
underway, Boeing began its campaign to enlist firms for a substantial German
stake in series production. Boeing being in a sole source position for lead
ship construction, the challenge then became how much of the work could they
and the program afford to share to maintain a critical mass of German support.

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Chapter 10

The firm selected by the German Government to be its German industrial partner
for systems engineering work in the FRG was AEG-Telef unken. Luerssen, who had
built the $-143 fast patrol boats under sub-contract to AEG, was to serve in a
similar capacity for the NATO PHM production in the FRG.10^

Though German industry had been unwilling in 1972-3 to assume any significant
risk in the development of sub-systems, the German shipbuilding team AEG-
Telef unken and Luerssen did originally show a strong interest in eventually
producing the system under license. Discussions between Boeing and the two
German firms began in 1973.^

There were basically three options under negotiation with AEG-Telef unken for
co-production in the FRG. The first involved AEG acting as prime contractor,
with Boeing acting as a supplier of technical assistance and hardware as in a
standard license production program (Mode #1 of industrial collaboration).

The second involved a joint venture being set up in the FRG to produce the
system under license with Boeing participating along the lines of A! i navi and
the P-420 hydrofoil (a variation of Mode #1). The third option would have
been one where Boeing itself would have been responsible for production of the
system in the FRG, subcontracting, out to German industry for a major share of
the work (Mode #6 or Mode #7 depending). As one might expect AEG pushed the
first option and Boeing the latter. Negotiations drug on over these arrange-
ments from late 1973 into 1975.109

One stumbling block was German industry’s stance on receiving the background
rights for the system to which they felt entitled through their government's

E-100

Chapter 10

funding of R&D. Boeing was naturally reluctant to enhance any future competi-
tors by giving away without adequate consideration some 12 years of IR&D that
had antedated the NATO PHM project, amounting to an investment of some $100
million.

Boeing and AEG could not reach a meeting of minds over the terms of a German
production program, i ,e. , work sharing. With the lack of agreement between
Boeing and the German firm, by late 1974 AEG-Telef unken and Luerssen's interest
in co-production of the PHM in the FR6, began to sour. This deteriorating
situation began to impact the heretofore strong German government support. HO

As cost and schedule problems increased the original strong working relation-
ships that Boeing had built up with Italian industry and government and the
German government could not be extended to German. Industry. In all, five pro-
posals were developed for the FRG in an attempt to define an acceptable level
of German industrial participation. The attitude of the participants began to
change.

Then came the reversal in 1974 when the Two-way Street (Zwei-Bahn Strasse)
concept began to replace the US-FRG troop off set agreements, eliminating this
inducement for direct purchase and/or unbalanced work-sharing arrangements .
Additionally, the German shipbuilding industry had in the interim become severely
depressed. National shipbuilding industries are generally one of the most
highly protected industries throughout the world. The German shipbuilding
industry is geographically concentrated and politically very potent. HI In
addition to having no significant stake in the NATO PHM project, with their

E-101

Chapter 10

S- 143 Schnel Iboot, the German industry had a competing alternative to fulfill
the Bundesmarine1 s requirement

Other factors contributing to an undermining of German support during the
1975-77 period, as offered by Joe Madden, Boeing's former German program
manager, included:

The requirement for the German Frigate which, together with another
Boeing project, the AWACS, created the largest demand for funds from
the Bundesmarine.

The unavailability of PHM test data which would support a submittal
of the program to the Bundestag before the Frigate program was ready
itself.

High cost - which was unsuccessfully tackled by cost reduction alter-
natives and competition. Blohm & Voss was competed against Luerssen,
and eventually MBB and VFW-Fokker were brought in by the German govern-
ment to compete with AEG -Telefun ken.

An acceptable share of work for German industry was never established
in terms of goals. This left industry grasping for solutions. 10
boats in the U.S. ; 5 boats in the U.S./5 boats in the FRG; 1 boat in
the LJ.S./9 boats in the FRG. The plan was for the MOD to present a
"menu" to the Bundestag and let them (the politicians) decide.

E-102

Chapter 10

AEG-Tel ef unken was marginally interested in the technological advances
in weapon system integration offered by the PHM, since the S- 143 alterna-
tive was not to the same state-of-the-art. Luerssen, however, was in-
terested in further building of fast patrol boats with wooden hulls
since that is their main field of excellence and competitiveness. Since
both AEG-Tel efun ken and Luerssen stood to benefit more from the sale
of S-143 than PHM, good working relationships between them and Boeing
were difficult to maintain.

The above led to a competition for funding and a loss of socio-economic
benefits accruing to the FRG through PHM procurement. The S-143A deriv-
ative then came into the picture. Efforts to stress the superiority
of the PHM/S-162 over S-143A were interpreted in the FRG as a campaign
against its Frigate program, thereby increasing the dilemma for S-162.
When the Jetfoil was demonstrated in Kiel to revive German interest,
orders went out that no one above the rank of Captian was to

participate.

Another relevant factor centered on misunderstandings that arose from the dif-
ferences in procurement practices between the U.S. and the FRG. The issues of
price and the assumption of risk were tied in with the German government's
requirement for guaranteeing system performance.

The Germans tended to use ceiling prices for their budget rather than target
prices with some additional reserves. The USN finally explained the ceiling
prices were too conservative for funding purposes. H4

E-103

Chapter 10

The German government and industry had to negotiate the increment in additional
cost by assumption of risk by industry. The government then had to elect whether
to: 1) increase the contract value with the terms of the contract specifying
the additional risk; or 2) to exclude the risk from the contract and hold the
additional money in reserve.

These issues made it difficult for the FRG to establish its budget requirement.
Moreover, none of the Boeing proposals upon which the German budget requirement
for the S-162 were based was ever negotiated between Boeing and the project
office since Germany never coimitted to procure the S-162 on the basis of any
one of the proposal s.^^

Naturally, had it been a smooth running, on schedule, and on budget project,
German government (and thereby industry) would have been more interested. But
as these problems became more severe during 1973 and 1974 support began to
erode.

The interdependence of the various nations support for the project has been
the crux of. the problem. Besides the usual difficulties of maintaining support
for a program within the Executive and Legislative branches, and such standard
problems as rising costs due to labor, material and unforeseen, but corrected
technical problems, the other major problem has been one of working the military-
political system of a nation externally (i.e., as a foreigner), with regards
to the FRG in particular. As stated by Gene Myers,

The original support of the German government was not sufficient to
carry the program. A substantial work sharing package was required

E-104

Chapter 10

to provide a firm foundation for the project. Moreover, it is the
technical/quality factor of this work that is most important. It is
not simply a question of dollars or marks. Technology participation
is critical. What was needed was strong industrial support from
within the FRG to sustain it. A government-to-government agreement
doesn't make the sale. ^7

Although the NATO PHM requirement involved joint design and development on the
governmental side, on the industrial side - where it is even more significant
- there wasn't any significant joint development. Hence, from where would
come this necessary indigenous industrial support, so vital to sustaining the
requirement in the face of constantly changing international environment and
competing demands for resources within the other nation's military-political
environments?

Within the German government the program also came up against increasing obsta-
cles during the 1975 to 1977 period. As previously mentioned, the German Govern-
ment's attitude was not immune from that of its industry, which had begun to
deteriorate. The NATO AWACS program, moreover, had an impact on funding availa-
bility for established programs as well as creating somewhat of a backlash
affecting the general attitude toward collaborating with the U.S. on NATO pro-
jects. The NATO AWACS project actually came to be seen in some quarters as
somewhat of a competitor with the NATO PHM project. There were also a series
of changes within the German bureaucracy, (i.e. , the FMOD, the BWB, and the
Bundesmarine) that led to the replacement of key supporting personnel by others
with differing orientations. Then the USN's cut-back of its order in 1975,
from the projected 24 PHM's down to six. This had a significant impact on the
unit cost of the systems for the FRG.

E-105

Chapter 10

As such, the German shipbuilding industry was generally less than satisfied
with the benefits offered in the way of technological spin-offs, jobs, and
exports, while those elements supporting the PHM project were without signifi
cant political clout in the FRG. Add to these the German priorities vis-a-vi
employment stability, and the dwindling support within the FMOD and the
Bundesmarine due to unit cost, budgeting, and personnel changes, and the NATO
PHM project was further undermined.

So when the Carter Administration unknowingly offered the Germans a face sav-
ing way out in early 1977, they took it. The purely national alternative of
an additional order of another 10 S-143A Schnel Iboote was chosen over the
alternative of 10 NATO PHM's. The official reasoning given by the FMOD for
the reversal was the unfavorable logistical impact it would have had on a
Bundesmarine already suffering from manpower problems. With limited comnon-
ality between the S-143 and PHM (though they did have the same gun and fire
control system), it was claimed that supporting the two could only exacerbate
the problem. 118

As for the other European partner, there had been strong Italian government
and industry support in promoting the NATO PHM from the start. Italian
industry, however, had no real interest in participation in the development
effort and the assumption of risk involved. This was in part due to its
having been more than adequately compensated by the large U.S. Navy purchase
of the 0T0 Melara gun for the PHM (and other USN ships), with the navigation
radar, and a large share in the G.E. LM 2500 engine production. But more
generally, this lack of interest was also typical of Italy’s placing a lower
priority on industrial participation in design and development of military

E-106

Chapter 10

systems than Europe's three medium powers.^ In addition to the Italian
equipment that would be standard for all NATO PHMs, Italy of course was planning
to produce PHM's under license for its own and possible foreign sales.

Therefore, the crucial problem of industrial support (and therefore political
clout) played a larger part in the German decision to withdraw, than the Italian
decision. Budgetary and cost problems were more important considerations in
the case of Italy, though by no means unimportant as far as the FRG was con-
cerned either.

Chuck Slater's thoughts on the subject gained during his years in Boeing's
Rome office during the early 70' s were shared with the author in 1984.

Viewed in the largest possible context, it is very improbable that
any project as advanced technically and as "radical" as the PHM could
be the basis for a solid, successful NATO development program.

Precisely because it was so small (smaller crew, less prestige for
the commanding officer) there was an element in the USN blue water
ranks not favorably disposed toward hydrofoils. I am certain officers
in other navies had similar thoughts about the hydrofoils lack of
space, amenities, etc. The Bundesmarine is basically conservative,
and I think this finally surfaced. (I suspect the Italian
government was heavily influenced by the tremendous success in the
I960' s of Carlo Rodriquez of Messina, Sicily, in building surface-
piercing hydrofoils for use worldwide.)

With the exceptions of the British and the French, the other allies
have very small defense hardware budgets and, consequently, can't
afford to, and don't take much technical risk. These people just
aren't accustomed to the large cost over-runs typical of the state-
of-the-art development programs and can't absorb them economically
or politically.

Lower life-cycle costs may play a noticeable role in convincing the
USN to consider/buy hydrofoils. I don't think they have any appre-
ciable role in Europe or elsewhere since military pay scales are

E -107

Chapter 10

so low and the initial cost the craft so high as to really impact
total budgets.

Related to the foregoing is the necessity to keep the appetites of
the purchasing countries under control. If the German Navy really
wanted a credible, highly effective substitute for conventional
Lurssen FBP 1 s in the Baltic, they could have bought the P420 or a
platform no more than half the size of the PHM. As it was, they
went first class, costs got too high and they got out.

E-108

Chapter 10

12. The International PHM Supplier Team

The principal source of industrial participation for the FRG, and possibly
Italy, (and any other NATO nation eventually joining) was to come later through
license production of PHM's in their own countries, once the lead-ship/develop-
ment phase had been completed. However, the lead-ship and later production
series ships did include substantial foreign content.

The following is a break-down of the equipment suppliers for the PHM:

The FRG

Suppl i er
MTU (Bavaria)

Philips A.G. (Hamburg)
Litef-Litton Technische Werke
( Baden-Wurt en berg )

Anton Kaeser K limatechni ck
(Hamburg)

1 1 al y
- SMA
Fiat

0T0 Mel ara

diesel engines for hull born
propulsion

the inner communications system
the gyro

the air conditioning system

which was GFE.

The Nether! ands

Hollandse S ignal apparaten (HSA)

The U.S.

General Electric

AiResearch

Aero j et

Western Gear

Bendix

the fire control system (FCS).
(lead-ship only)

LM 2500 f oi 1 borne engine

accelerator, power units, and
compressors

propul sors, pumps and water jets

foil borne gear box
(production series only)

frequency converter

The fire control system (FCS) for the lead-ship was built by the Dutch firm
Hollandse Signal apparaten (HSA), and in the U.S. by Sperry (under license from
HSA) for the five production series PHM's. The lead-ship FCS was German Govern
ment furnished, having been originally procured for one of the Bundesmari ne' s
S-143's. The FCS accounted for S7 million per production ship in GFE.^0

The 0T0 Mel ara gun was originally to be procured by the U.S. Navy from Italy
only for the lead-ship program. For series production of the five U.S.N. ships
the U.S. licensee of 0T0 Melara, the Northern Ordnance Division of FMC

E- 110

Chapter 10

Corporation , was to produce the guns. However, due to later difficulties in
meeting the schedule, these guns as well had to be procured directly from Italy
by the U.S. Navy.

For the five series production PHM's delivered to the USN in 1981 and 1982,

Boeing received about $46 million per ship. Boeing placed almost $2 million
per ship for both the lead-ship and series production work packages in the FRG
and Italy. 121 From among the GFE, totaling about $20 million per series produc-
tion ship, the Italian-built guns account for another $2-1/2 million per ship. 122

With total cost per ship at about $66 million, this totals up to some 7%123 0f
the production series ship's cost involving direct procurement from Europe,
with another 10% (all GFE) being built in the U.S. under a European license.

As such, for the lead-ship, the European built portion came to around 17% . 124

If figured as a percentage of purchased material and equipment for the system,
these percentages would be several times higher. For the five production series
PHM's Boeing dealt directly with the four German equipment suppliers above,
but not the three Italian suppliers. The 0T0 Mel ara gun is government furnished,
the Fiat participation with the LM2500 engine is as a second tier subcontractor
to General Electric, and SMA navigation radar is bought through its U.S. sales
agent, Norden.

Being a NATO, as opposed to United States project, the work distribution
described above naturally led to the usual 'everything's negotiable' scenario
once it came to hammering out contractual arrangements . The problems generated

E-lll

Chapter 10

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. PHMi Hydrofoil Project

by the need to reach a mutual realignment of differing defense procurement
practices (along with their underlying conceptual foundations) have already
been covered for the negotiations over the manufacturing license agreement
between Boeing and AEG-Telefunken for the production of the S- 162 derivative
of the PHM in the FRG (Section 11).- At the lead-ship subcontracting level,
the dominant role of the U.S. government and defense industry, and their
limited experience with joint design and devlopment projects led to a certain
lack of flexibility when it came the flow-down of ASPR and Boeing's own
General Provisions to German subcontractors. Though mutually acceptable
deviations of conmon practices were eventually reached, it did take some time
and gnashing of teeth. The German firms repeatedly pointed out that they were
partners in a NATO project, not subcontractors in a U.S. project.

On the one hand, in negotiating purchase orders, the four German suppliers
agreed to provide a cost breakdown, by filling out the U.S. government's
DD 633 form. The Boeing Subcontract Manager, German-born Jot Ott, Manager
for all of these except MTU, reported that he had never experienced any
particular reluctance in the area of submittal of cost data for proposals and
during negotiations.

After some initial foot dragging on the part of the U.S. Government, certain
socio-economic ASPR provisions were waived, per usual, such as EEO, and Clean
Air and Water certification requirements. A virtually unique exemption was
granted for the project, however, with regards to U.S. Cost Accounting
Standards (CAS). Ordinarily, a waiver is granted to any contract or
subcontract over $100,000 awarded to a foreign government, agency or
contractor pertaining to

E-112

Chapter 10

►'

O -

-3

FOREIGN EXCHANGE RISK AND PRICING

the requirements of CAS 403 and subsequent standards. This exception however
does not relieve foreign concerns of any obligation to comply with CAS 401
and 402, and to submit a disclosure statement. A special exemption from CAS
401 and 402 was granted for the NATO PHM Project, though. 125 cas 401 and 402
require consistency of practices in the areas of estimating, accounting,
reporting and allocating costs.

In the area of procedural deviations, Boeing for its part had some initial
problems agreeing to their German industrial partner's unconditional demands
that the purchase orders be denominated in Deutschmarks, which they ultimately
were.

No German government audits were ever required for the approximate! y six and a
half million dollars in initial procurement contracts'to German industry for
the five production series PHM's.

For government provided quality assurance services the US Government's DCAS
office in Wiesbaden usually, but not always, delegates its responsibilities to
the German government's BWB/GP branch.

As for turn-around time on repairs, Joe Ott reported that the experience with
the four German suppliers was averaging between 4 and 13 weeks in mid-1982
depending on the firm. Otherwise the supplier's technicians are brought over
to do the repair in the U.S. MTU in particular had an excellent record, hav-
ing a well developed North American service network, with reps in Tacoma,

E-113

Chapter 10

Washington, and Houston, Texas. Repairs associated with the SMA radar gener-
ally involved longer periods, with particular problems emanating from ship-
ments getting hung up in Italian customs for several weeks, and the difficulty
of working through a second party (the U.S. sales agent).

The excellent product support provided by MTU involved an example of another
issue. Tech Manuals and other data provided by suppliers or licensors of
technologically complex equipment items usually need to be supplemented by
some degree of person-to-person explanation to effectuate sufficient transfer
of know-how. Though a common phenomenon, this tends to be more accentuated
when the supplier or licensor is a foreign firm where there is generally a
greater reliance on very specialized technicians and less on documentation.
Specifically, the U.S. socio-economic environment is oriented more toward
interchangeability of personnel than Europe, where there tends to be less
turnover (examples of this were also brought out in Chapter 12 with the F-16
and NATO AWACS projects and Chapter 9 for the U.S. Roland). For the hullborne
engines, Boeing found itself relying heavily on the MTU technical
representative who was a resident at the nearby Tacoma Boatbuilding shipyard
(a designer and builder of conventional fast patrol boats, among others) in
order to supplement the Tech manuals it had received as part of the hardware
procurement. This was in spite of the fact that Boeing never explicitly pur-
chased technical assistance or even warranty coverage.

E-114

Chapter 10

13. The Italian P-421 Class of Hydrofoils and the HMS Speedy

As the NATO program was collapsing, and being continued as a USN project in
1977, Boeing Marine Systems military hydrofoils were beginning to meet with
success elsewhere within the Alliance on a bi-lateral commercial basis (i.e.
outside of any government to government MOU's).

The development of a Tucumcari derivative in Italy, the P-420 Spaviero, was
followed by a contract award for six production series ships, the P-421
through the P-426, in 1977 (as covered in Section 3, sub-section f). These
are generally perceived as being substitutes for the originally planned NATO
PHM procurement.

Another procurement of a Boeing hydrofoil for an allied Navy involves an
earlier dropout of the NATO effort, the U.K. The Royal Navy's HMS Speedy
ocean patrol hydrofoil was ordered in June 1978 from Boeing, as the first
offshore patrol hydrofoil version of the Boeing Jetfoil. The 115-ton Speedy
was launched at Renton, Washington in July, 1979, and was delivered to the
Royal Navy in April 1980.126 This was the first non-commercial derivative of
BMS's corranercial Jetfoil. Following production trials in Seattle, the Speedy
was shipped to the U.K. later in the year for fitting with crew
accommodations, rafts, and radio and navigation equipment by Vosper
Thornycraft, under a $2.5 million subcontract from Boeing (i.e. about 14% of
the total acquisition price of $17.5 million).

E -115

Chapter 10

Source: Boeing PGH-2 Tucuoicari

The Speedy, like the Tucumcari before it, is a 'brown-water navy' ship,
destined for operations in coastal waters, whereas the PHM is a 'blue-water
navy' ship, i.e., one destined for the high seas.

Subsequent to HMS Speedy's commissioning with the Royal Navy in June 1980, the
50-knot hydrofoil underwent trials and crew training at Portsmouth and
Portland on Britain's south coast. These included speed and maneuverability
measurements, onboard noise trials and other studies characteristic of this
type of naval vessel.

Later in the year, the HMS Speedy began a six-month operational evaluation
with the British Royal Navy's Fishery Protection Squadron at HM Naval Base,
Rosyth, Scotland. During the initial three months of evaluation. Speedy
operated in as many fishing areas and with as many different fishing vessels
as possible, patrolling throughout the United Kingdom's 200-mile extended
fisheries limit. Operations the final three months were centered on roles in
which the hydrofoil proved to be most suitable. Fishery Protection Squadron
activities include patrols of the United Kingdom's vital offshore gas and oil
installations. Evaluation in the anti-submarine and fast patrol boat roles
may follow. ^

During its transfer to Rosyth, Scotland, Speedy broke the speed and distance
record enroute for a Boeing Jetfoil , covering 320 nautical miles from
Portsmouth to Flamborough Head, off Yorkshire, at an average speed of 42 knots
(48 mph) before refueling in Newcastle. The entire trip was against head

E-116

Chapter 10

Source: Boeing Ocean Patrol Hydrofoil {(PH)

' . HMS Speedy

The British Military Requirement

•

r-~

'S O

C'v

winds between 15 and 35 knots and in moderately heavy seas (sea-states of from
two to five) .

According to a Royal Navy spokesman: "We are very impressed with Speedy's
performance in such bad weather conditions. It is clear it can operate in
much worse weather than normal, fast patrol craft. "128

After arriving off the east coast of Scotland, the Jetfoil covered 380
nautical miles in a single day's nine-hour patrol within a 40-mile corridor
between Aberdeen and the Firth "of Forth, during which its crew identified 43
different fishing vessels. Speedy has also successfully carried out night
patrol and boarding exercises. The Fisheries Protection Squadron has found
that the Speedy has capabilities comparable to three conventional patrol boats
in this role, and thus offers the possibility of considerable operational
savings.

The United Kingdom was the first nation to deploy a derivative of the commer-
cial Boeing Jetfoil on naval duties. The aim of HMS Speedy's evaluation
program has been to determine the best operating patterns for high-speed
hydrofoils to supplement the Royal Navy's existing conventional craft. 129

E-117

Chapter 10

MISSILE GUNBOAT

1965 1966

1967 1968

1969 1970

1971 1972

1973 1974

1975 1976

1977 1978

1979 1980

1981 1982

PGH 2

TUCUMCARI

PHM

NATO

PROGRAM

U.S. LEAD SHIP
PROGRAM
(PHM 1)

PRODUCTION

PROGRAM

PROPOSAL DELIVERY

V 2

CARIBBEAN

■3

OESIGN AND

PRODUCTION

CONTRACT

EUROPEAN
DEPLOYMENT

t7 grounding

A.- A I

VIETNAM

DEPLOYMENT

EXPLORATORY
GROUP 2 ESTABLISHED

U J. ANNOUNCED/
DECISION TO
PROCEED

PROJECT GROUP 6 A
ESTABLISHED

MEMORANDUM OF
UNDERSTANDING SIGNED

FRGJTALY
ISSUED LETTERS
OF INTENT

ITALY DECISION
NO PRODUCTION
SHIPS

COOPERATIVE
PROGRAM
y COMPLETED

FRG DECISION
NO PRODUCTION
SHIPS

LETTER
CONTRACT
I ^

preliminary"^
OESIGN

CONSTRUCTION DELIVERY TO

CONTRACT SURFPAC

T7 OPEVALv v ’

S & *

SO CAL

SURFLANT

DEPLOYMENT

/ CARIBBEAN
/ EXERCISE
I (REAOIEX •

Z-F 1-80)

PHM 1‘
LAUNCH

DEPLOYMENT

RIMPAC
EXERCISE

PROPOSAL
PROOUCIBILITY « V

STUOY x

RFP
ISSUES

AWARO

START

PRODUCTION

DELIVERIES
PHM 3 y

PHM 4

PHM 5

NEGOTIATIONS

COMPLETED

PHM 6 17

PHM 2 y

Major Events Leading to NATO PHM Program and Operational PHM Squadron

14. Sequel

After giving birth to a derivative, the Italian Spaviero and the P-421 Nibbio
class of hydrofoils, and its follow-on system the PHM, the PGH-2 Tucumcari ran
aground off Puerto Rico in November 1972, incurring damage beyond repair.
November 1972 also happened to be the month that the U.S., German and Italian
navies finally signed the MOU which was to serve as the NATO PHM program's
charter. The operational Tucumcari had in the meantime provided a central
thread throughout the weaving of a concensus within NATO that eventually gen-
erated its follow-on system, the PHM.

a . The U.S. Navy's PHM Program

In the end, following completion of the jointly funded lead-ship program, only
the USN entered series production of PHM hydrofoils. In November 1981, the
U.S. Navy cited a total 6 hydrofoil program cost figure of $462 million to
Congress in its Selected Acquisition Report (SAR). For reasons covered
earlier in the sub-chapter, both Italy and the FRG dropped out after contrib-
uting $13.5 million and $30 million respectively to the design and development
of the system. The German and Italian governments each have their PHM techni-
cal data packages (complete up through the date of their respective with-
drawals) which, at this point in time, can be utilized as they see fit.

It is doubtful that the PHM program would ever have been launched if it had
not been for the initial support of the Italian navy, and then later the
German navy with its January 1971 study contract award. The 241.3 PHM design

E- 118

Chapter 10

reflects a compromise between the U. S. Navy's original 170-ton concept and the
German Navy's 230-ton concept, but one heavily weighted toward the latter.

More generally, the design is one tailored to a military requirement common to
a number of our allied navies.

In 1982 and early 1983 Boeing Marine Systems delivered to the U.S. Navy its
five production series PHM's (of the PHM-3 class) PHM-3, PHM-4, PHM-5, PHM-6,
and PHM-2, the last of which was commissioned at Key West, Florida on March
12, 1983. The six ship PHM squadron is currently stationed at Key West, but
an eventual Mediterranean development is planned. In the meantime it is pro-
viding a check on the military build-up in Cuba, and participating in the
nation's efforts to counter drug smuggling along the Caribbean coastline.

In February 1983, Boeing Marine Systems was awarded a $14 million contract by
the U. S. Navy to provide logistics support for the PHM squadron through
September of that year. Under the logistics contract, a significant departure
from the traditional Navy practice of providing this support itself, Boeing
was to manage the procurement, issue, and repair of all spares unique to the
PHM's; provide technical support; and serve as the planning yard for configu-
ration control and designed alterations. A follow-on logistics support con-
tract was expected.

b. A Bundesmarine S-162?

Also worthy of mention, is that, as of 1983 the S-162 version of the PHM is

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Chapter 10

Improved Fleet Effectiveness in the North Sea With S 162?s

one of several systems under consideration by the Bundesmari ne for the
replacement of its S- 143 around the 1990 time frame.

c. Introduction of the PHM's Italian Gun and Dutch PCS into the U.S. Navy's

Inventory and their License Production in the U. S.

In addition to the conmonality of the G.E. LM2500 marine gas turbine with a
large number of other U.S.N. ships (i .e., FFG-7 class patrol frigates, the DD-
963 and DDG-993 class destroyers and the CG-47 class Aegis cruisers) inter-
national standardization was also addressed. The NATO PHM program played a
critical role in the introduction of two widely utilized European systems into
the USN inventory that were adopted simultaneously and on a much wider basis
for the USN's FFG-7 class of frigates, and later for the Coast Guard's Bear
Class of 270 foot cutters; the 0T0 Mel ara 76 mm dual-purpose gun and the
Hollandse Si gnalapparaten (HSA) WM/28 fire control system. ■

Both of these systems are now being produced under license in the U.S. (Mode
#4 of industrial collaboration) , the gun by the Northern Ordnance Division of
FMC Corporation and the FCS by Sperry. Yet two more examples of the US Gov-
ernment's willingness to further the two-way street. Sperry's production line
was able to get up to speed on schedule. 130 Northern Ordnance took longer
however, and not only did the U.S. Navy have to buy the five guns for the
production PHM's from the Italian licensor, 0T0 Mel ara, but a number of the
guns destined for the FFG-7 frigates as well.

E- 120

Chapter 10

The British Military Requirement

d . The Italian Navy's P-420 Class of Boeing/CNR Hydrofoils

As yet another legacy of the 58% ton PGH-2 Tucumcari , even though they left
the NATO PHM program after several years of participation, the Italian Navy
now has an operational squadron of 7 P- 420 * s . The 62 ton derivative of the
USN/Boei ng PGH-2, has been built in Italy by CNR under a license to Boeing
(covered in Section 3 of this subchapter). Moreover, the Spaviero/Ni bbio
class, as does the alternative to the S- 162 selected by the Bundesmarine , the
S-143A, is equipped with the 0T0 Melara 76 mm gun. CNR is optimistic as to
the chances for foreign sales materializing in the near future.

e . The British Navy Launches the Boeing Ocean Patrol Hydrofoil (OPH)

Though the British were short of funds and never joined the NATO program,
their representative, who served as an observer on NNAG SWG-6 was later to
play a critical role in launching yet another line of Boeing military hydro-
foils, the Ocean Patrol Hydrofoil with its 1978 order of the 115 ton HMS
Speedy, a derivative of Boeings 110 ton commercial Jetfoi 1 -cl ass of hydrofoils
(covered in detail in Section 13). At the time of his service on NNAG SWG-6
and PG-6, Jack Daniels was Director of War Ships for British Shipbuilding. As
Director General of Ships for the Royal Navy several years later, Daniels
oversaw the award to Boeing of a Fisheries Study contract in September 1977
and the placing of the order for the HMS Speedy the following year for its
test by the Royal Navy as an off shore surveillance and protection vessel.

Source: Boeing Ocean Patrol Hydrofoil fCPH)

HMS Speedy

f . The Grumman PGH-1 Flagstaff Resurfaces

In spite of the adoption of various Boeing hydrofoils by three NATO navies
subsequent the NATO PHM program's collapse, elsewhere, we again see interest
on the part of an allied navy in adopting hydrofoils originally designed and
built for the USN. The Grumman PGH-1 Flagstaff resurfaced after losing out to
the PGH-2 in the USN/NATO competition, when Israel ordered 2 lead-ships to be
built by Grumman for test and evaluation by the Israeli Navy, and considered
for possible license production later in the 80's.

g. The Indonesian Navy's Boeing OPH and License Production

The most recent military hydrofoil development involves the Ocean Patrol
Hydrofoil (OPH) and a developing nation, Indonesia. The Indonesian Agency for
Development and Application of Technology purchased its first OPH from Boeing
in 1981, the Bima Samudera I. The ship began both military and commerci al
operation in Indonesian waters in March 1982. The Bima Samudera I has been
used in coastal defense and customs enforcement roles as well as for off-shore
oil operations and conmerci al passenger transportation. The quick change
capability of the Jetfoil will enable opertors to easily adapt interior
arrangements for a number of varying roles. This derivative of the Jetfoil has
double the fuel capacity of commercial Boeing Jetfoils to allow longer endur-
ance missions.

The Indonesian trials covered nearly 10,000 nautical miles during 245 hours
under way and proved the Jetfoil stable and reliable. During the denonstra-

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Chapter 10

Grumman Aerospace has launched a 100-ton hydrofoil patrol boat it is building for Israel. The
boat was launched from the Lantana Boat Yard, Fla., and is being tested. The vehicle is
designated Design M161 and is a version of Grumman’s hydrofoil patrol vehicle, Flagstaff
PGH-1. The Israeli boat is 84 ft. long and capable of 50 kt. speeds when foilborne.

tions , the Bima Samudera I established several records, including a continuous
foi 1 borne operation of 11 hours, 8 minutes .131 The Indonesian Navy has iden-
tified a long-term requirement for up to 47 Jetfoils. Commercial passenger-
carrying Jetfoils would be in addition to that requirement .132

In October 1983 it was announced that the Republic of Indonesia had reached
agreement with Boeing Marine Systems for a follow-on purchase of four Boeing
Jetf oi 1 hydrofoils valued at $150 million and an option for six additional
Jetfoils. The agreement includes cooperative manufacture under license of
Jetfoils in Indonesia. 133

The initial contract for the purchase of four Jetfoils for use in coastal
patrol, calls for Boeing to assist P. T. Pabri k Kapal ( P, T. PAL), the Indone-
sian national shipbuilding facility, in developing the capability to manufac-
ture the high-technology hydrofoils. 134

While P.T. PAL will obtain the technical data package, rights and know-how to
build the Jetfoils, Boeing will continue to manufacture the critical el orients
of the struts and foils and the automatic control system, and supply those to

Indonesia. 135

The rate at which the program expands will depend upon the growth in the Indo-
nesian economy, which has been moderate recently due to reduced worldwide oil
pri ces .135

If Indonesia opts for the additional six Jetfoils, the value to Boeing would

total $330 mi 11 i on . 137

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Chapter 10

The first two Jetfoils will be delivered in 1984, followed by one in 1985 and
one in 1986. These will be structurally complete hydrofoils with outfitting
and interior accommodations to be added by P.T. PAL. 138

The first two OPH's will be Boeing Jetfoil Model 929-119' s while those sub-
sequently built will be Model 929-120' s.

The story is by no means told. The 80 's will see ever wider adoption of
hydrofoils for military use, a phenomenon in which the NATO PHM program has
played a leading role.

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15 . Conclusion

The PHM project started out as a transatlantic joint development project (Mode
#5) that could have represented a reasonable compromise between the differing
U.S. and European^ philosophies on joint development. However, it ended up
more along the lines of a U.S. led transatlantic production effort along the
lines of Mode #7140 while being procured, at least initially, only by the lead
(or sponsoring) nation— the project having become more vulnerable in the mean-
time to competing indigenous alternatives for fulfilling the requirement and
budgetary priorities on the European end.

The NATO PHM and U.S. Roland^l programs serve as. poignant reminders of the
U.S. Armed Services willingness to admit substantial allied design input only
for the marginal, more controversial military requirements. For the more rock
solid military requirements, allies generally enter the picture only after
unilateral U.S. design and development, as customers of U.S. systems for
which some sort of production sharing arrangement might be worked out, (i.e..
Modes #1, #2, #6, or #7 of industrial collaboration). As demonstrated by the
history of both the NATO PHM the AVS fighter project and U.S. Roland pro-
grams , initially favorable reception of the foreign (e.g., the Franco-German
Roland SAM system) or partially foreign (e.g., NATO PHM and AVS) system is
contingent upon the ephemereal conjunction of personalities and policy direc-
tives. These are easily sacrificed with the resurgence of factions previously
held in check within the services, or the change of administrations. On this
latter point, the fate of both projects was in part decided by new administra-
tions moving into Washington D.C., looking around for a target upon which to

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make their marks, by dispensing with the excess backage of their predecessors.
What more likely targets are there than those controversial systems where the
requirement is perceived as marginal by much of the service concerned, and
therefore one that has to suffer the epitaph of 'political.1

And the DoD wonders why the U.S. has an image problem with regards to our
credibility and consistency, and is viewed as an unreliable partner. Of
course prospects of technology transfer and access to the U.S. market will
both continue to serve as incentives for foreign firms and governments to take
the risk of joining up with the U.S. in such projects (Modes #4, #5 and #8 of
industrial collaboration). But they will continue to be mindful of the risks,
and the large majority of joint design and development projects will continue
to exclude the U.S. (Mode #3 of industrial collaboration).

As a comment on the weight placed on the rational allocation of resources in
the national decision-making processes in an alliance of sovereign social
democratic nations, the project once again shows the limitations on the abil-
ity of the member states to hold together on a common endeavor all the way
through design, development, and into production, in the face of a host of
other competing national priorities. It also suggests the inevitability of
considerable unilateral development of weapon systems for the foreseeable
future. This latter point seems to be especially true for that large number
of systems for which either:

The cost of unilateral development is not prohibitive, or;

Those for which there' are reasonable prospects of export sales, or;

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Chapter 10

Those controversial high technology systems for which a pressing require-
ment was not clearly perceived by more than one ally, initially at least,
as with the PGH-2 Tucumcari and E-3A A WAGS projects.

So, not only have three allied navies decided to procure 3 different Boeing
Marine Systems hydrofoils, but the remaining nations have been content, at
least for now, to fill their requirements through conventional patrol ships.
Satisfaction of NATO RSI is conditional upon the fulfillment of such higher
antecedents as jobs, the acquisition of technology and exports. Here we have
yet another project that has enriched our inventory of examples of the prob-
lems faced, and lessons learned, in the joint development and production of
weapon systems within the Alliance.

The conclusion to this section on the NATO PHM is provided by several excerpts

from a comnentary by Admiral Elmo R. Zumwalt , USN (Ret.) on the Schrader and

Duff article that appeared in the same issue of Naval Engineers Journal.

The success of the PHM Program to date and the decision to proceed
into production is all the more significant, I believe, in view of
the unprecedented number of unusual problems this program has been
required to resolve— problems really unlike most of those of any
prior conventional ship program. As I recall, in addition to PHM
being the first advanced surface ship planned for Fleet introduc-
tion, it is also our Navy's first truly cooperative NATO shipbuild-
ing program, first metric ship design, first to incorporate major
foreign weapons and electronics systems, and a host of other firsts,
as well, including the first total ship operational test program
prior to a production decision. 142

And in response to the criticism that the PHM is just an expensive PT boat,
whose utility is limited primarily to that of the tail-dog role, Zumwalt
wrote :

PHM is more than just a small, fast ship. It represents a new naval
capability to project significant power at sea in smaller, less

E- 127 in
Chapter 10

ecr ™ee forths prks of one

You can buy three Boeing Patrol
Hydrofoil Missileships for the same price
as one of the next lowest cost combat
vessels.

But that's only one reason why PHM
is one of today’s best defense bargains.

L PHM burns less fuel and flies with a
smaller crew, which lowers her overall
operating cost.

2. She’s the fastest ship in the fleet
She’ll do better than 40 knots. Ride smooth
even in rough seas. And turn on a dime.

3. Her speed, manueverability and
sophisticated electronics make her
practically invulnerable to enemy planes,
subs or other ships.

4. She packs one heck of a wallop.
Standard weapons include 8 Harpoon
missiles, an Oto Melara 76 mm rapid fire
gun, a Rapid Bloom 0 Aboard Chaff
system, an MK-92 gun fire control system
and an ESM system. And with some
modifications, you can arm for anti-sub or
anti-air or mine laying missions.

5. She’s effective in all kinds of weather,
in blue water or along the coast.

6. PHM has proven herself. Pegasus,
PHM-1, has already joined the fleet and
five more are under construction.

All of which means, where numbers
count, PHM is a number to count.

MARINE SYSTEMS

expensive, faster reacting and versatile units, than we ever had
before. Viewed in terms of lifecycle costs, the 21-man PHM really
is much cheaper than any competing systems, even considering it from
the single mission standpoint. We have not really begun to consider
the added value of other mission applications.

My views of high-low mix are already well known; we have to face the
reality of need for more ships we can afford.

It may be that we have lost sight of the objective of enabling our
NATO allies to share a greater role in their naval defense by
actively promoting such naval vessels as PHM. It is my understand-
ing, however, that more recent action by our Departments of Defense
and State may be reversing this situation and seeking to promote
renewed participation in the PHM Program by our NATO allies. 143

Schrader and Duff had further developed this last point, that of the challenge

the program poses with regards to the implementation of the NATO RSI policy.

There also remains the question of the U.S. intent with respect to
.PHM and NATO. The original objective of PHM was a relatively low
cost naval weapons system which could enhance not only the U.S.

Navy's surface warfare capabilities, but those of our NATO allies as
well. By enabling NATO Navies to procure ships particularly suited
for the coastal and narrow seas environment of Northern Europe and
the Mediterranean Sea, it was hoped to also reduce the extent of
U.S. Naval Forces committed to these areas. Thus far this objec-
tive has failed to be achieved. There is indeed question that it is
still perceived as a naval objective by current national

leadership. I44

The U.S. has been criticized in NATO circles for treating NATO coop-
erative programs as a one way street for Foreign Military Sales
(FMS) programs.

To the extent that the United States does desire to increase common-
ality of NATO defense weapons systems, it is important that we put
forward a commitment to procure such systems on a cooperative basis.

The NATO PHM Program was the first naval ship program that promised
both some degree of truly cooperative production as well as serving
a NATO and U.S. naval mission, and third country sales. Yet, when
new political and economic considerations were introduced, the basic
international considerations of prior years proved to be short
lived, and for the case of the Federal Republic of Germany appeared
to be easily sacrificed for what were considered to be higher prior-
ities. A challenge remaining today is to reinstate PHM as a viable
naval weapons system for NATO. This will require a more committed
spirit and promotion of cooperative PHM procurement, mission devel-
opment, and employment than has characteri zed the program to date,
but is considered nonetheless to be an attainable and worthwhile
objective with military and economic benefits too real to be ignored
indef i nately.^45

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Chapter 10

16. PHM— Lessons Learned

The following lessons learned relevant to the inter-allied aspect of the

project are summarized below:

1. The decision making process of any government involved in an inter-allied
project is extremely sensitive to destabilization by the other partici-
pants' intra-governmental disputes over the merits of the project. This
is especially true when this merry-go-round is occuring in the lead, or
sponsoring, nation, creating havoc in the others. These debates often
take place in a vacuum, especially in the U.S., ignoring the partnership
aspect of the project and the impact it has on the program budgeting and
decision-making processes in the dependent nations.

2. As a result of the above problem, the "upward" management responsibilities
of the Project Manager in inter-allied projects are of even greater
importance than would otherwise be the case.

3. Jointly funded projects lacking sufficient industrial participation for
all nations concerned ( i . e . , 'sufficient' being a function of such factors
as national industrial capabilities and needs, size of expected sales
base, and the individual national orders) are extremely vulnerable to
order reduction/cancellation. This also displays the bankruptcy of the
U.S. 'interdependent' development policy vis-a-vis major systems (sum-
marized on page 2), except possibly within the context of a multi-project
grouping such as the Family of Weapons.

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Chapter 10

4. Closely related to (3) above, is that such projects are easily undermined
by competing purely domestic alternatives, even when they offer rather
marginal substitutes. This is especi ally true when such considerations as
employnent , technology spin-offs and third country sales offer greater
benefits for a given nation and thus prevail over the usually lower domes-
tic political priority given to inter-allied projects and Alliance
considerations.

5. Industrial property rights appeared once again, as in virtually all other
projects, as a major hurdle to be cleared in the structuring of the
national work packages. The PHM offered a particularly difficult chal-
lenge in this regards.

6. To the above five points concerning the consequences of excessive turbu-
lence at the intra- governmental level in the sponsoring nation and insuf-
ficient industrial participation for the partner nations, should be added
the industry wide problem of keeping costs under control. Though a perva-
sive problem, there is no doubt that Boeing and the U.S. Government could
have done a better job of wrestling with this slippery beast. Taken
together, though there are honest differences of opinion as to how one
might prioritize these six points, they do sumnarize how Boeing and the
U.S. Government failed to keep the project sold to the German and Italian
navies.

7. Once the above relatively controllable points are treated, then one must
take the more deterministic factors into consi deration. A basic fact of

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Chapter 10

life is that inter-allied projects have a greater exposure to disruption
by macro- economic and international political developments. This is
inevitable. Here we saw the part played by the oil crisis and the subse-
quent Italian foreign exchange crisis, the world-wide shipbuilding crisis
and its effects in the northern part of the FRG, and the evolution of
attitudes represented by the discontinuance of the FRG-IJ.S. Troop Offset
Agreements and the appearance of the Two-Way Street concept.

8. Though the above seven points must be summarized as they are a major com-
ponent of the lessons learned of this particular NATO project, they are
offered simply as reminders of well known problems. Where this project
history is most revealing is in its earlier phases. Here it provides us
with one of the best examples yet of how, with the right product, entre-
preneurial initiative can lead to the launching of an inter-allied project
in the first place. Whereas the NATO AWACS project offers us a particu-
larly unique example in the selling of an inter-allied project of this
scale, it was the USAF, not the contractor that took the initiative. The
contractor came in shortly thereafter and performed its support role in
this particularly sensitive operation superbly. For the NATO PHM project,
on the other hand, a small contractor team working not only through the
U.S, Navy, but a number of European navies, played a more significant role
in initiating and guiding the project. How this was woven together is
probably the most interesting aspect of this project from a historical
viewpoint.

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Chapter 10

9. More generally this project offers us another glimpse at the workings of
NATO's Main Armament Groups. It is particularly useful in this regards as
it serves to 'flesh-out' the otherwise sterile organization chart and pro-
cedures commonly available for orienting the uninitiated. The dynamics of
concensus formation in this highly politicized decision-making environment
with regards to agenda, source selection and intergovernmental coordina-
tion are of particular interest.

10. One specific instance of these dynamics that is the second most revealing
group of lessons learned (or better yet warning signs of dilemnas to be
encountered) of this project are centerd on the MOU negotiations. These
took place within the framework of the NATO Naval Armament Group's (NNAG)
Project Group (PG) 6 during the second half of 1971 and later under the
aegis of the three nation NATO Project Steering Committee through most of
1972. This involved juggling the following: the strings to be attached
to utilization of the Technical Data Package under a royalty free license
once the jointly funded lead-ship design, development construction and
operational evalution program had been completed; interdepartmental coor-
dination within the U.S. Government; and separating the wheat from the
chaff ( i . e . , sifting out the less than serious nations while still allow-
ing adequate time for each prospective participant to line up his ducks),
while attempting simultaneously to get substantive MOU negotiations off
the ground and carrying out a design study aimed at adequately meeting the
differing military requirements of the yet fluid set of parti cpants.

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Chapter 10

11. Systems involving significant foreign design input are general ly only can-
didates for filling the more controversi al (and what is perceived as mar-
ginal) requirements of the U.S. Armed Forces. Vested interests in the
Pentagon and industry work very hard to keep foreign design (and
manufacturing) input out of the programs which are solid, high priority,
and have good business ( $) potential. This controversi al/marginal
requirement problem and the higher visibility of inter-allied project
tends to make than easy targets when shifting political fortunes within
the services, or a new Administration, bring to the fore a new set of
actors unencumbered by the long-term inter-allied partnership commitments
of their predecessors and calling for a sacrifice on the alter of "I'm in
control here."

12. As a result of the above phenomenon (11), the cost control problems
endemic to the industry as a whole, become even harder for the U.S. to
justify for inter-allied projects. Cost problems that are pardonable on
the more rock solid military requirements, tend to become mortal sins for
those requirements involving inter-allied projects, i.e. when the require-
ment is inevitably less firm; partnership considerations being more highly
expendable in the U.S.

13. It is especially difficult to stuff the differing, and often mutually con-
flicting military requirements of two or more nations into one system.

The NATO PHM, after the reduction of participating nations down to five,
and then to three, was able to attain a militarily acceptable balance
between a standard ship and national variations for the equipment weapon

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Chapter 10

suit (though this did contribute to cost increases). It was the budge-
tary, economic, and industrial problems that arose in the mid-1970's that
eventually broke up the joint project.

14. And finally, this project history provides yet another example of the
intractability of the problem of Alliance-wide standardization and the
orchestration of the various military requirements, replacement schedules,
budgeting processes, and so forth. Three of the allied Navies active in
NATO's Project Group 6 have each acquired different Boeing Marine Systems
hydrofoils, while the others have continued to procure conventional patrol
• ships.

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Chapter 10

^Jane's Surface Skimmers, 1980, p. 297 (Moreover the PHM can negotiate 8 ft.
waves at speeds in excess of 40 knots).

^The Fire Control System consists of the radar, displays and weapon system
controls.

^Joseph N. Schrader and Cdr. Karl M. Duff, USN, "The PHM: Surf ace Warfare Ship
Technology Takes a Step Forward," Naval Engineers Journal.

^An approach that we see is more acceptable on lower level R & D projects.

4At least when the joint German-American AVS and Anglo-French Variable
Geometry (AFVG) fighter projects were cancelled in the. 1967-68 time frame, the
UK and the FRG had their two halves left to start the MRCA Tornado project.
^Jane's, op. cit., p. 294.

^NATO Patrol Hydrofoil Guided Missile (PHM), a brochure published by the Dept,
of the Navy, Naval Ship Systems Command, Washington, D.C. in mid 1972, p.5.
(Hereafter referred to as "NATO PHM, NAVSHIPS. . .")

Slbid.

9Ibid.

l^One year is the maximum time allowed under NATO document for participating
as an observer, C-M(66)33, by which time each nation had to put up the money
to join, or drop out all together.

11 Ibid

l^BMS also produces a commercial jetfoil.

l^In addition to Boeing, the list of competing firms included Lockheed,

Hughes, Martin plus three others.

l^Stefan Geisenheyher, "Hydrofoils are coming of age," Asian Defence Journal,
7/81.

15 Ibid.

1® In fact, Boeing de'signed the PGH-2 to permit a turn radius of less than 100
meters at speeds up to 45 knots. Furthermore, although no specific
requirement was imposed by the U.S. Navy for maneuvering in heavy seas, Boeing
chose to design the Tucumcari so that maneuvering would not be impared by
rough water operation.

17 The Tucumcari not only satisfied the trials requirement for an
uninterrupted 400 mile transit in open seas but exceeded the required 40 knot
average speed by 6.1 knots. During this transit in the Pacific Ocean off the
coast of the United States, significant wave heights of 3.5 to 4.0 meters were
negotiated, while foi 1 borne.

^Following an inconclusive completion of Operational Evaluation (OPEVAL), the
two ships were deployed to Viet Nam in the fall of 1969 and the winter of 1970
for six months of coastal patrol duty between Danang and the DMZ.

l9In turn, during overhaul in 1973, the PCH-1 High Point's foil and propulsion
systems were revised, as previously mentioned, to incorporate several of the
advances proven by the Tucumcari: a steerable forward strut; and anhedral
configuration (foils canted downward from center to tip) of the aft foil.

20 The superiority of the Tucumcari in the critical area of reliability and
maintainability became glaringly evident during the Fall 1969 - Winter 1970
Vietnam deployment of the two ships.

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Chapter 10

2lThe Otomat surface-to-surface naval missile was jointly developed by 0T0
Melara of Italy and Engins Matra of France, and was one of several missiles
under consideration for the Italian variant of the NATO PHM.

22Francesco Cao, "Provinq the Swordfish,” International Defense Review, Vol.

7, No. 6, 1974, p. 755.

23 ib i d . , p. 756.

24Ibid.

25lbid., p. 757.

26 ib i d .

27 ibid-
28 ib i d .

^Interviews with Boeing's former Tucumcari Project Manager (1965-68) and the
first PHM Project Manager, Gene Myers (October 1971 - August 1973), between
October 1977 and May 1982.

30Ibid.

31Ibid.

32Utilized by the PG-84 240-ton fast patrol boats built by Tacoma Boat.

33The German Military Procurement Agency

34Though the Germans were responsible for much of the pioneering work in surface
piercing hydrofoils, having developed the technology during World War II, they
couldn't close the gap when efforts picked up again in the mid-1960's.

33Myers, op. cit.

36 Ibid.

37Marinetechnik PI anungsgesel 1 schaft mbH, a brochure dated August 1976 published
by MTG, p.5.

33 Ibid. p.6.

39Ibid.

43There were still reservations, however, voiced by many in both industry and
the defense establishment as to the merits of having such an organization.

They expressed misgivings that industry had encouraged creation of companies
for accomplishing tasks which traditionally had been (at least in part) a govern
ment prerogative. This raises problems in the competitive area, since these
companies include personnel belonging to corporations which are defense
contractors. Even with the best of intentions it was widely understood that
some conflicts of interest and a degree of curtailment of competition were
unavoidable.

The German frigate project, for one, reportedly demonstrated in the early 70' s
that the existence of an organization like MTG severely limits the customer's
freedom of choice with respect to awarding the contract for ship system
definition.

41Ibid., p.8.

43Actually though the Dutch HSA WM-28/52 was the baseine offered in the Model
928-70 baseline design , the French Thomson Vega FCS was also offered as a
second option (the one originally mated to the Aerospatiale Exocet MM-38
anti-ship missile) .

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Chapter 10

^Throughout this period and over the next several years there was constant
internal pressure within Boeing which kept introducing Boeing's German affili-
ate, MBS, into the picture as Boeing's German partner over MTG, and later AEG
Telefunken. At this point in time Boeing owned 8.9% of MBB stock.

44Myers , op. cit.

45 Though the developmental proposal was put on the shelf, the KKB-162 study's
evaluation and anc i 11 i ary efforts continued through the summer and into the
fall.

4® Correspondance of R. G. Merritt between July 1971 and January 1972 (here-
inafter referred to as "Merritt correspondance") .

47 Ibid.

^Myers , op. cit.

4^Ibid.

^Grumman was considering submittal of a protest over the source selection as
they felt the decision was questionable, but never did. Subsequently, Grumman'
participation continued with the award of further hydrofoil R&D work from the
Navy.

Myers op. cit.

52ibid.

53 Ibid.

54Xbid,

55 Ibid.

55 According to a 1974 GAO report on cooperative research and development pro-
grams, the UK and Canada failed to participate in the PHM program for several
reasons, one of which was budgetary problems (the others weren't mentioned).

One would take note, however, of the common, if no inevitable, phenomenon of
NATO allies having "difficulty" finding funds for an official NATO project
representing a system for which there own domestic competing design (and the
military requirement it was tailored to) had lost out.

57Charles H. Slater, letter to author, February 1984.

5®Myers , op. cit.

59 Ibid.

55*The day of D.B. Cooper's Hijacking of an aircraft shortly after take off
from the Seattle-Tacoma (SEATAC) International Airport, while the PHM project
people were across the street celebrating the award in a hotel.

5lMerritt correspondance, op. cit.

5^Myers,. op. cit.

55Both the NATO Project Steering Committee and the NATO Patrol Hydrofoil
Project Office would remain 'provisional' until the MOU was actually signed
and NATO Project Group 6 was dissolved.

64NATQ PHM, NAVSHIPS, op. cit., p.8.

55 Ibid., pp .8-10.

550fficials responsible for the NATO hydrofoil fast patrol boat program stated
that the participants had problems deciding on whether to use the metric
system, the Anglo-Saxon system of measurement, or both. This took several
months to resolve. Finally, since some of the already developed components
were made

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Chapter 10

according to the metric system and some according to the Anglo-Saxon system it
was decided that a mixture of the two would have to be used. A metric hybrid
design was consequently resorted to as it was impractical to produce a design
based on a uniform measurement system. (Comptroller General, op. cit., p. 23.)
87Adm. Ruzzia was Italy's Technical Procurement Chief for Ships, equivalent to
the USN's Naval Sea Systems Command.

88Myers, op. cit.

^Mr. Tympe, a civil servant, as is the norm in the FRG for such assignments
was the BWB's Deputy naval architect.

78Myers , op. cit.

71 Meyers, op.cit.

72 Merritt correspondance, op.cit.

73 Ibid.

74 Ibid.

78NAT0 PHM, NAVSHIPS, op.cit. p.15
76Ibid.

77Ib id . , p.17.

78The S-148 procurement involved one of the more unique bi-lateral off-set
arrangements (Mode- #6 of industrial collaboration). It was the purchasing
nation, the FRG that had to place orders for 10 of its 20 Luerssen S-148 ' s in
France (Cherbourg) as part of a deal allowing the Bundesmarine to receive the
much sought after MM38 Exocet anti-ship missile (the first of its kind) several
years sooner than it otherwise would have.

78The H3A WM/28 FCS was a one-gun version of the WM/27, which handled two guns.
^Myers, op. cit.

81NAT0 PHM, NAVSHIPS, op.cit., p.27.

33 Ibid., p.26.

83The MK 92 FCS on the FFG-7's have capabilities above and beyond those on the
PHM as they are not only controlling a gun but also a SAM system. Consequently
they have a cross field amplifier that provides a longer range, and a continuous
wave guidance system for the missiles.

84NAT0 PHM, op.cit., p.26.

85Ibid., p.28.

88The FRG for its part had spent 1 mil ion DM for the development of the KKB-162
spec.

87The U. S. too had a routing/higher level coordination problem but of a dif-
ferent sort. In 1977 the Office of the General Counsel, Office of The Secre-
tary of Defense (OSD), assumed a central policy coordination role for the pro-
liferating inter-allied MOU's. Prior to 1977 there had been none. Every U.S.
service's acquisition components ‘ had been carrying on their own negotiations.
Sometimes less than ideal MOU's had resulted. Unlike our European allies with
whom they had been dealing, the D00 had no small cadre of experienced negotia-
tors in such matters. U.S. negotiators were often new at the business of
negotiating MOUs. A number of very lop-sided agreements had resulted. A 1977
DOD directive finally began to tackle the problem by requiring all such agree-
ments be sent up to the OSD's Office of the General Counsel for approval.

E-139

Chapter 10

S8in actuality, the chairmanship was never rotated, the U.S. rep retaining the
position through dissolution in 1977*

"The U.S. payment includes amounts which were made available for obligation
and expenditure prior to the entry into effect of this Memorandum.

"Section III of the MOU distinguishes between the Standard Design and the
Variation Design.

NATO PHM Ship Standard Design means the technical information (des-
cribing the design features, configurations, equipments, components,
materials, installation characteristics), and other requirements
which are desired by the Participating Governments to be uniformly
applicable to all NATO PHM Ships to be acquired under this coopera-
tive project.

NATO PHM Ship Variation Design means the technical information and
other requirements which are specified by an individual Participat-
ing Government for application, initially, to its NATO PHM Lead Ship.

NATO PHM Ship Production Data Package is the integrated total of the
technical information comprising the two above designs.

^Schrader and Ruff, op. cit,

"The choice of the word 'Supplement1 was not without significance. The rea-
son the follow-on MOU was set up as a ‘supplement1 was that the U.S. wanted to
make it clear that this was not a design only lead ship project. On this point,
some par-ties thought that, as a supplement to an MOU, the full administrative
sign-off process could be avoided. This was not the case. Though, it tied in
with the first one, it was a whole new agreement,

•'-Most of the new engineering talent being brought back in came from the Saturn
and other NASA programs based out of Huntsville, Alabama and Michaud, Louisiana.
NASA business in general was fast disappearing at this point in time. Later
inputs of technical and managerial personnel came from Minuteman and then the
Boeing Conmercial Airplane Company,

^Schrader and Duff, op. cit.

"ibid.

"The dichotomy between the lead ship and the production ships is not all that
clear cut. Block I includes PHM-1 and part of PHM-2 (work having been sus-
pended in August 1974), while Block II includes PHM-3, 4, 5, 6 and the remainder
of PHM-2, PHM-2 also involved some surplus equipment from Block I since the
design of the production ships (Block II)' is different from that of the Pegasus
and the original PHM-2,

"The delay however, had caused a $13 million increase in the program's esti-
mated cost. And since an internal Navy reprogramming to provide this funding
shortfall was subsequently disapproved by the Secretary of Defense, the PHM-6
was to be delivered without a weapons suit. The funds for the PHM-6 weapon
suit were finally obtained in FY81 with installation planned for 12-15 months
following delivery.

"Schrader and Duff, op. cit.

"ibid.

E-140

Chapter 10

lOOlbid.

^Timothy Egan and Eric Nalder, "Navy's hydrofoils fast becoming idled," Seattle
Post-Intell iqencer, March 25, 1982., p. A-9.

ITJ2

103

Ibid.

104^yerSj op. cit.

lOSibid.

106Ibid.

layers, op. cit.

108ouring this period, 1973 and 1974, AEG helped Boeing in its drawn out efforts
to obtain U.S. Government waiver of the flow-down of its Cost Accounting
Standards (CAS) some elements of its Armed Services Procurement Regulations
(ASPR) to German industry.

l°9Interview with a former Boeing PHM Materiel Manager, Earl Hagen, November
1981.

110Ibid.

Hl-This concentration was in the North, while what German industrial partici-
pation there was, was scattered across the country.

112Myers, op. cit.

H3joe Madden, Boeing's PHM German Project Manager from 1975 to 1977, memo to
the author July 1982.

114Ibid.

115Ibid.

116Ibid.

117Myers, op. cit.
l^Myers, op. cit.

^Though Italy had hovered on the sidelines of the first three inter-allied
joint designed development projects (all of which were Franco-German), the
Atlantic, the Transall and the joint tank project that resulted in the AMX-30
and Leopard I, it was only able to come in later for the production phase of
two of these, and belatedly at that. This involved an offset a la Mode #6 for
the Atlantic maritime patrol aircraft and license production (Mode #1) for the
Leopard I. The largest inter-allied development project ever, and one involv-
ing the Italians, the MRCA, was only just barely able to keep them on board;
at the price of subsidy through favorable financing and work sharing terms
during design and development. As we saw in the previous sub-chapter concern-
ing the NATO Seasparrow project, Italy assumed a minor role in design and develop
ment, but dropped out of the follow-on development project, the SLMS.

l^Ojoe Ott, Materiel Manager, Boeing PHM program, interviews between March and
June 1982.

l^Two-thirds of this being built in the FRG and one-third in Italy.

122Ibid.

1230f this 7% that was European built (4% GFE and 3% CFE), 85% came from Italy
and 15% from the FRG.

^240tt, op-cit.

E-141

Chapter 10

125 John S. W. Fargher, Jr., "Financial Management of Defense Codevelopment and
Coproduction Programs," National Contract Management Journal , Volume 16, Sum-
mer, 1982, Issue 1, p.8.

Later UK contractors, for performance substantially in the UK, also received
an exemption provided that the UK contractor has filed a completed disclosure
statement with the Ministry of Defense.

Boeing had sold a total of 23 jetfoil as of late 1981.

126»$peedy sets record en route to UK evaluation in Scotland", Boeinq News p.
5, 12-18-80.

127 1 bid.

12^1 bid.

129jbid.

13°Aft er an initial program that involved production in the U.S. in the mid-
60' s at Sperry of only two evaluation protytpes of an earlier model HSA FCS,
the WM/22 (with no follow-on production orders), the U.S.N. and U.S. Coast
Guard have adopted the more advanced WM/28, now in series production (see
Chapter 9) .

131"i nd ones ia Order Four Jetfoils worth $150 million," Boeinq News, p. 4,
October 6, 1983.

132 Ibid.
l33Ibid., p. 1.

12^1 bid.

133 Ibid.

126i bid .

127 1 bid.

128ibid.

129Meaning primarily the 3 mediun powers.

l40But one involving some joint funding of development work carried out uni-
laterally by U.S. industry, as with the AWACS and F-16 projects.
l^lMode #4 of industrial collaboration.

l42Elmo R. Zumwal t. Admiral USN (Ret.), Naval Engineers Journal, June, 1978,

p. 16.

l43Ibid.
i44I bi d .

l45!bid., pp. 16-17.

E - 142

Chapter 10

F. NATO SEASPARROW

1 . Background: Evolution From the USN's
IPDSMS to NATO's NSSMS

A. The Participants

The NATO Seasparrow Surface Missile System (NSSMS) is a ship-based point air
defense system with a range of about 20 kilometers^ that was jointly developed by
an industrial team of U.S., Norwegian, Danish, and Italian firms. The NSSMS is
jointly produced by the original grouping of firms from these four nations, plus
several more from Denmark, the Netherlands, and Belgium. A total of 86 ships in
eight NATO navies plus the navies of two other allies, Spain and Japan, are
equipped with this surface to air missile (SAM) system. For the U.S.N. this
involves the 12 attack carriers (CVN's) and all of the DD 963 Spruance class
destroyers .

The system has been procured by the Navies of the six producing NATO nations,
plus two other NATO allies, the FRG and Greece, as well as two non-NATO nations,
Spain and Japan. The NSSMS has the distinction of being the only major
transatlantic codeveloped weapon system to have achieved success.

Much as with the F-16 coproduction effort (which involved no joint industrial
development however) some seven years later, the U.S. was able to interest the
four smaller northern NATO members (Belgium, Denmark, the Netherlands, and
Norway) in participating in a transatlantic effort, over European alternatives.
Italy, generally in the same category as the four northern members, joined the
U.S. -led NSSMS effort in 1968.

Chapter 10
F-l

Dannebrog
Electronic A/S

constructs the NSSMS micro-
wave receiver ax. Arhus, Denmark.

Henning Jensen
Program Mgr.'
Systems Division

NEA — Lindberg

of Ballerup, Denmark, manufactures
transmitter static frequency conveners.

Jom Finnich
President

Bent Rasmussen

Purchasing Mgr.

Ole Fehm

Mgr. Quality Control

Erik Fenger
Project Engineer

Green-Petersen
'■'ice President

As is the norm, the three European medium powers followed their separate
2

courses. The FRG eventually gave up its unilateral effort, the Koumar, and

decided to buy the NSSMS on an off-the-shelf basis in 1977, too late for any

offsetting production participation. The U.K. is procuring its Sea Wolf point

defense system, developed and produced by Marconi and British Aerospace, while

France is working on a ship-based version of the Crotale surface-to-ai r missile,

the Naval Crotale, developed jointly by the French firms Thomson-CSF and Matra.

B. The USN's Improved Point Defense Surface Missile System
The NATO Seasparrow surface missile system (NSSMS) utilizes one of the Sparrow
family of missiles that were designed and developed by Raytheon for the U.S. Navy
and U.S. Air Force. The NATO Seasparrow missile, nomencl atured the RIM-7H, is
built around the technologies that created the AIM-7E Sparrow 3 air-to-air
missile. The RIM-7H missile itself is a modification of the USN's AIM-7E
model .

The NSSMS emanated from a larger U.S.N. program known as the Point Defense
Surface Missile Systems (PDSMS). The PDSMS were all developed around the
AIM-7E and the program covered three individual projects during the 1960's:
the Basic PDSMS; the Improved PDSMS (soon to be the NATO Sea Sparrow); and the
Advanced PDSMS. The Basic and Advanced PDSMS were both independent U.S.N.
efforts throughout. However, only the former program, the Basic PDSMS, ever made
it into production.

The Basic PDSMS uses a modified 8-tube ASROC missile launcher with a manual fire
control system and the AIM-7E missile. Its development began in 1964 with
Raytheon as prime contractor. Raytheon failed to win the production contract,

Chapter 10
F-2

however, one which was awarded to Frequency Engineering Laboratories. Raytheo
only produced the Sparrow 3 missile for the system.

The Improved PDSMS , or NATO Seasparrow, incorporated a new lightweight 8-cell

launcher, a fire control system (FCS) using digital computers, a Target

Acquisition System (TAS) with dual-mode sensor, and a power-driven

di rector/i 1 1 uminator radar. Its RIM-7H missile is a modified A1M-7E2, having

folding fins to enable it to fit into the smaller launch cells. The RIM-7H

can function in any installation which is designed for the AIM-7E, thus

facilitating depot testing and maintenance.

In 1966, the Applied Physics Laboratories (APL) of Johns Hopkins University,
supporting the U.S.N.'s Point Defense Systems Manager, was given the task of
writing the Performance and Capability Requirements for the fire control and
launcher system of the Improved PDSMS, shortly to become the NSSM5.

Once the documentation produced was put into a design and performance
specification format with the assistance of the Vitro Corporation, a contract
was let for the six-month Contract Definition (CD) phase. The contract was

awarded to Raytheon by the U.S. Naval Ordnance Systems Command in June, 1968.

C . The NATO Program Takes Shape

Meanwhile, in Brussels, a parallel line of developments was occurring. In
late 1966 NATO abolished its prior organization for promoting collaborative
weapon systems programs - the NATO Armaments Committee and its subgroupings -
and its procedures for promoting cooperation in research, development, and
production of military equipment, based on the NATO Basic Military
Requirements (NBMR's) - and contained in NATO Document, C-M(59)82. NATO

replaced them in early 1967 with the Council of National Armament Directors

Chapter 10
F-3

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(CNAD) as the new capstone committee, and a new set of procedures as set forth
in Nato Unclassified Document, C-M (66)33. NATO had experienced considerable
difficulty with the prior procedures, dating from 1959. Though the NBMR
procedures had been intended to be a flexible and practical means of
encouraging armaments cooperation, they in fact became overly rigid and led
directly to the successful codeveloprnent of only one major system, the Anglo-
German FH-70 Howitzer (NBMR 39).®

Under the old. system a codevelopment effort had to proceed through a maze of
NATO committees before it could get off the ground. As was treated in
Chapter 5 with regards to the Atlantic and V/STOL fighter projects, in
practice, this tended to allow all NATO countries, regardless of whether they
were financially participating in the program, or had their own competing
program, to have a voice in how the weapon system should be developed. As a
consequence, the time for required reaching a concensus for a given program
made the method prohibitive. This contributed to the scrapping of
codevelopment programs in favor of coproduction programs J What codevelopment
programs there were, took place outside the NATO framework as exemplified by
the codeveloped Anglo-French Jaguar, Martel, Gazelle and Lynx or the Franco-
German HOT, Milan, Roland and Alpha Jet, or the American-German MBT-70 and AVS
projects. For several among these, and such coproduction programs as NATO
Hawk and NATO F-104G, the participating nations sought NATO auspices for
programs, if at all, only after the systems had been developed.

NATO Seasparrow, as such, was to become a test case for the validity of the

new procedures that were set up in late 1966/early 1967. The only

prerequisite for cooperative projects under the newly established procedures

was that there be mutual agreement among any 2 or more countries choosing to

Chapter 10
F-4

participate as to the management, cost-sharing, and end products of the

program, prior to moving forward. Unanimity among all 'interested' nations
was no longer required only among the 'engaged' nations.

Therefore, unlike two of the other military projects treated in this chapter -
the MBT-70 and the Mallard communication system - the nations participating in
the Seasparrow opted to utilize NATO's organization and procedures for
collaboration, instead of working outside of them.

Consequently, in 1967, the U.S. proposed several candidates to the CNAD's NATO
Naval Armaments Group (NNAG) for cooperative development ventures. One of
these was a surface ship shelf-defense missile system, to counter the
recognized anti-ship missile (ASM) threat, one to be built around the Sparrow
3 AIM-7E air-to-air missile. Seven countries expressed an interest. Soon
this was reduced to four engaged nations —Italy, France and Norway, along with
the U.S. which —were represented on a project group under the auspices of the

NATO Naval Armaments Group (NNAG) - the NNAG's Project Group 2. The FRG,
Denmark, and the Netherlands participated as observers only and thereby faced
a one year deadline on joining in as engaged nations (i.e. funding and
voting) or dropping out altogether. The project group was supported in its
work by the U.S. Navy . ^

At the first meeting of NNAG Project Group 2, held in February, 1967,
preliminary agreement on the system configuration, a cost-sharing formula, and
a management approach, was reached. The agreed to configuration, previously
designated the Improved PDSMS, was based on the U.S.N.'s experience with the
existing Basic Point Defense Surface Missile System (BPDSMS) and the follow-on

study on an Advanced PDSMS, one which met the size and weight constraints of

Chapter 10
F-5

Nato Seasparrow Surface Missile System (NSSMS)
and the NATO Acquisition Process

all countries concerned. The Improved PDSMS provided a major improvement over
any existing self-defense SAM system.11

By the second meeting in April 1967 , the U.S. , Italy, and Norway indicated
that they were ready to move forward by making national commitments to
participate in the program. Three countries, the Netherlands, the FRG, and
France (the latter two were considering going ahead with their own national
programs), had decided not to go along and thereby dropped out, while Denmark
opted to remain as an observer. The three participating countries also
agreed that Raytheon would be the most suitable prime contractor, due to its
role in the development of both the AIM-7 Sparrow and the Basic PDSMS systems.

At the third meeting of the NNAG Project Group 2, in September 1967, Raytheon
introduced its tentative cost estimate for the project. This estimate
permitted the countries to more realistically plan their Seasparrow force
structure. In addition, a draft of the program management plan and the MOU
were submitted for review. Also, the program had in the meantime received
additional impetus from the sinking of the Elath - a timely reminder of the
vul nerabil i ty of surface ships to missile attack.

The fourth and final meeting of the project group took place during January,

1968. At this point Denmark decided to join in as a full participant. The

meeting concluded with complete agreement by the four nations on virtually all

facets of the program and the recommendation that it proceed into funded

development as soon as two or more nations signed the MOU. The four nations

launching the joint engineering development project were Denmark, Italy,

Norway and the U.S.

Chapter 10
F-6

During the four NNAG project group meetings, a recurrent pattern surfaced.
NATO's three medium powers, France, the FRG , and the UK once again went their
own way, uninterested in joining in as a minor participant in a project
wherein U.S. government and industry were in the dominant role. However,
their preferred alternative of collaboration on an equity basis with one of
the other two medium powers was not resorted to either, since all three
supported their own competing designs for a system wherein the investment and
sales base required did not necessarily represent an insurmountable obstacle.

Representative of the fluidity of both membership and national orders in such
ventures, as we will shortly see, there were to follow both order reductions
and increases, and the taking on of new participants once the project was
underway (though amazingly enough, there were to be no drop outs).

Underlying the formal concensus formation process within the NATO Naval
Armament Group (NNAG) outlined above whereby the goernment consortium was
neatly stitched together, was the support provided by the counterpart
industrial consortium led by Raytheon. From among the three European partners
the support of the Norwegian firm, Kongsberg Vapenfabrikk (KV), was especially
critical in: 1) tying in the Norwegian Navy as the primary European advocate
of the joint project and; consequently , 2) the Norwegian Navy's providing a
steady guiding hand in assisting the U.S.N. with the threading of the source
selection needle. Source selection becomes a very delicate undertaking in
these joint projects wherein it is necessary to designate a contracting team
early in the project and thereby avoid a drawn-out (and often
counterproducti ve) competition in line with the U.S. Governments dogmatic and
highly structured approach to competition.

Chapter 10
F-7

2. Organizing the Government

Consortium and the ED Competition

With the U.S., Norway, Italy, and Denmark having substantially agreed on

the program management, cost-sharing, weapon system configuration, and schedule

during their intermittent NNAG project group meetings between February, 1967

and January, 1968, it took another five months to obtain signatures on the

MOU governing program implementation. Once the MOU was signed by any two

of the nations, in this case the U.S. and Norway on June 7, 1968, the program

was endorsed as an official NATO Project. Denmark and Italy were to sign

several weeks later. The form and substance of the program remained essentially

unchanged after the January, 1968 meeting.

A. A Clean Chain of Command

Unlike many of the other joint programs covered in this paper, there is a
single line of authority for the NSSMS. Under the NATO Seasparrow Project
Steering Committee (NSPSC), acting as the board of directors, comes a single
program manager. The program manager heads up the NATO Seasparrow Project
Office (NSPO ) , located in Washington, D.C.,14 which operates with the administrative
support of the Naval Sea Systems Command (previously the U.S. Naval Ordnance
Command). The U.S. Naval Sea Systems Command contracts with the single
prime contractor on behalf of the NSPO. This prime contractor is, in turn,
responsible for the subcontractors located in the various participating
countries. Thus, there is a clean chain of command extending down from the
international Steering Committee to an integrated international organization,
the NSPO, which has operational direction and authority as well as detailed
management responsibilities, down to the prime contractor through a well-

defined contractor interface. As forthe prime contractor's relationship with the go

Chapter 10
F-8

THE ORIGINAL
STEERING COMMITTEE

The NATO Seasparrow Project Steering Committee
(NSPSC) was established under the guidelines of the
Memorandum of Understanding, to coordinate coopera-
tive action between the NATO countries. The committee
was formed with one member from each of the participat-
ing countries with meetings held quarterly, or whenever
required. The NSPSC establishes program policy and is
responsible for the approval of total development and
production contracts, schedules costs and configura-
tion control.

Rear Admiral 1mm antral B. Rodholm, the Danish member of the NATO Seasparrow
Steering Committee, has been the Deputy, Chief-of-Staff, Logistics in the Defense
Command since 1974. Past assignments have included the US Shipbuilding Liaison
Office in Rome, Flag Officer in Denmark, Plans Sc Intelligence of COMNAVBALTAP
and the Danish Naval Staff.

General Sverre L. B. Harare, presendv the Chief of Defense of the Norwegian Armed
Forces was the first Norwegian member of the NATO Seasparrow Steering Committee.
From 1958 to 1962, he served on the staff of the NATO Standing Group in Washington,
D. C. In 1975 General Hamre was relieved as a Steering Committee member when he
assumed command of the Allied Forces North Norway.

Rear Admiral Mark W. Woods, presently retired from active duty, was the Chairman
of NATO Seasparrow Steering Committee. He was Commander, Naval Ordnance
Systems Command, Washington, D.C. His past assignments include command of
the TERRIER guided missile frigate USS Fan-ague Executive Officer and Deputy
Director of the U.S. Naval Ship Missile Svstems Engineering Station. Pon Hueneme.
California.

Captain Legnaioli, Italian member of the NATO Seasparrow Steering Committee,
received extensive practical and academic training during his naval career. A graduate
of the Naval Academy at Leghorn, he has studied artillerv and missiles in both Italv
and the US. In 1967, he was assigned to the Naval General Office as Chief of Artillerv
and Missiles. Since 1971 . he has worked in industry as an Operauve and Technical
expert in Naval Weapon Systems.

Ten years ago a major
threat was recognized
by several NATO member

nations as a common concern
to the ships of their respective
navies should they become
engaged in defense of the NATO
Alliance so vital to the free world.
Accordingly a unique agreement was
reached to undertake the cooperative
development and production of an ad-
vanced shipboard defense system called
NATO Seasparrow. Subsequently seven nations signed a
Memorandum of Understanding to Participate in this endeavor. The recognized
success of this project owes much to the dedication of the founding fathers —
to the original Steering Committee and their capable successors, and to the high
degree of skill, enthusiasm and integrity found at all levels of the
industrial team on both sides of the Atlantic. For everyone

involved it was an enriching exchange of cultural and
technological expertise. Truly a fine example of
international cooperation. Because the
people worked well together —
their equipment is working well together
and we are all a little bit safer.

ti sj.ii , the contracting framework was that of normal DoD contracting, i.e.

'business as usual,' following ASPR, CAS, and receiving all its money from a
U.S.N. account.

The systems, however, are delivered to the non-U. S. participants through direct
commercial sales channels. Though sales to third parties (e.g., Japan and Spain)
are through regular FMS channels, sales to NATO participants are not offically
PM5. Although a DD250 is signed off by a USN inspector and used for billing
purposes (the U.S. Navy acting as agent for the other participants), the
U.S.N. only takes delivery of those systems destined for itself or non-
participants. For NATO participants shipment is made directly to each Navy's
designated forwarding agent.

Given the origins of the weapon system selected by the NNAG project group
participants and the size of national requi rements , the assumption of the role
of pilot state by one nation, the U.S., is not surprising. As we saw in the
Introduction to Part II, and Chapters 5, 7 and 8 though, this course is not
always the one followed in setting up a transnational venture wherein exists a
dual consortium of buying governments and selling industries. In the early
60 's NATO project management and contracting choice centered on the two
approaches adopted for the NATO Atlantic and the NATO Hawk projects. During
the 7 0 1 s the same Issue was focused on two other projects, that of the Alpha
Jet versus that for the MRCA Tornado. The NSSMS approach to NATO contracting
and project management was essentially the same as that followed for the
Atlantic and Alpha Jet projects, i.e., that of having one nation's government
and industry (France In the case of these two projects) assume the pilot (or
agent) role, and thereby opting to operate through that nation's defense

contracting structure. Though this approach offers the advantage of greater

Chapter 10
F-9

Italy

efficiency, equity is somewhat diminished. Where considerations of equity
prevailed, as with the Hawk and Tornado projects the nations moved outside of
the national defense contracting environment and established a NATO subsidiary
body, a NATO Production and Logistics Organization (NPLO). This entails
however, the building up of a new contracting and project management
framework, unique to that project.

B . The NSSMS Project Steering Committee

The highest level of authority for the NSSMS project is the NATO Seasparrow
Project Steering Committee, consisting of one representati ve from each
participating country. Nations joining after the signing of the MOU have had
to be accepted by a unanimous vote of all members. The NSPSC has retained the
res pons i bil ity for management, finance, and technical decisions in accordance
with the MOU. Since decisions in matters of technical as well as financial
content for the NSSMS are so reserved, the NATO Seasparrow Project Office
(NSPO) was established outside of the normal U.S. Naval Sea Systems Command
structure, being directly responsible to the Steering Committee and
representing it in its day-to-day operations, serving as its working staff.

The continuity of key U.S. personnel has been singled out as a significantly

contributing factor to the smooth running of the program . This was particu-
larly important during the early years with Captain Stanley Counts serving as
Project Manager of the NSSMS until October, 1970, and then becoming the U. S.
representative on the Steering Committee, as Rear Admiral Counts, upon leaving

the prior post.*®

In July 1968, one month after the official activation of the NSPO and the award

of the definition phase contract to Raytheon, the Steering Committee was convened

Chapter 10
F-10

in Washington for the first of its quarterly meetings. This meeting was largely
concerned with organizational questions. The nations agreed that all specifi-
cation, schedule, and cost matters involving the NSSMS would require unanimous
consent on the Steering Committee. Other decisions would be settled on a
weighted majority vote basis, according to each government's funding share. ^
Subsumed in this unanimous vote requirement involving specification was another
reportedly unique aspect of the program, at least as far as the U.S. is

concerned. Configuration control rested completely in the Steering Committee.

Raytheon's NSSMS assistant Project Manager for International Operations,

Thomas E. Peterson, attributes the Steering Committee's effective decision-
making authority and executive direction to the commitment of the participants,
their willingness to compromise, and their detailed comprehension of the pro-
gram, which, in turn, could be projected through a clean chain of command.
Raytheon's Thomas Peterson further added for clarification, "The Steering Com-
mittee's role (a la NSSMS) is one of a Project Manager (directing body)" . . .
vested, among other things, with Configuration Control. "The P-16 Steering

Committee role, for comparison, is that of staff function serving as an advisory

body only--no direct line of management into the consortium program."

C . The NSSMS Project Office

The NATO Seasparrow Project Office (NSPO) was activated informally in April,

1968, and staffing was begun in anticipation of the signing of the MOD. When

the MOU was signed two months later on June 7, by the United States and

Norway, the NSSMS Project received official NATO sanction and the NSPO was

officially opened. A gradual evolution took place over the following months

during which the NSPO staff took control of the recently begun Contract

Definition phase. During this learning process the NSPO was heavily dependent

Chapter 10
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NATO Seasparrow Project Management

upon the active participation of APL, Vitro Corp., and especially the U.S.

Naval Ordnance Command. Once operating, the NSPO has continued to be

dependent on the administrative support of the U.S. Naval Ordnance Command,

as well as the support of the naval offices among the Participating

Governments which have assisted the NSPO in reflecting the best interests of

all members of the consortium.

Composition of the NSPO staff roughly reflected the national financial commit-
ments as they stood at that time, with the U.S. providing 18 of the 21 staff

members as of mid-1969, including the program manager, a U.S. Navy Captain.

Norway, the next largest customer at that time, provided the deputy program
manager. Denmark and Italy each furnish one officer as subsystem managers.
When the Netherlands and Belgium joined the program in May and June, 1970,
they collectively provided one additional officer, bringing the non-U. S.
contingent up to four. These officers also have direct access to program
manager as national deputies for their respective governments.

D. The Enginering Development Competition

In October 1968, the Contract Definition (CD) report was delivered to the

NSPO. The NSPO and the participating navies then assembled an evaluation team

to study the report. As the evaluation proceeded, it became apparent to all

on the team that the equipment defined by Raytheon's CD report was too big,

too costly, and too limited in operational capabilities to warrant proceeding

directly to an engineering development contract.

At the Steering Committee's next quarterly meeting, in December, 1968, in

Washington, it received the recommendations of the Project Manager concerning

Chapter 10
F- 12

NATO SEASPARROW
PROJECT OFFICE

UNITED STATES NSSMS OFFICE/DUAL FUNCTION (PMS-404-60)

the CD report. Instead of the original plan, the Project Manager's report,

unanimously supported by the evaluation team, recommended resorting to

competitive bidding for the Engineering Development contract. So, the

Steering Committee directed the Project Manager to write the necessary

baseline specification and to advertise for competitive bids. The

specification was written in draft form prior to the departure of the '

representatives of the European navies. The specification was published in

February, 1969, and, shortly thereafter, some 14 U.S. companies were

invited to submit proposals. Proposals were due by May 15 at the Naval

Ordnance Command. The firms bidding for an engineering development contract

for the NSSMS were still bidding on a system that would use the Raytheon

Sparrow missile (and, therefore, also be similar to the U.S.N. 's Basic PDSMS

in this respect), but one which would involve the development of new radar,

fire control, and launching systems, each based on a new design and

performance specification.

The detailed proposals submitted were received by the NSPO in June, 1969, and an
evaluation began. The evaluation team, numbering almost 100 evaluators, again
consisted of representatives of the four participating navies. The evaluation
team studied the proposals and measured each individually against the NSPO origi-
nated specification. Review of the proposals, evaluation, and the subsequent
negotiations intended to provide acceptable equipment at a fair price, culmi-
nated in the report to the Steering Committee in the latter part of the summer of
1969. 26

In September the Steering Committee met in Washington, to receive the reports of
the Evaluation Board and the Project Manager. The Steering Committee then
directed that the Engineering Development contract be awarded to Raytheon by the

Chapter 10
F- 13

Naval Ordnance Command; the contract being signed immediately therafter, the

same month, September 1969, for some $23 million.

Chapter 10
F- 14

3. Joint Development and Production

A. The Initial Plan

The engineering development of the system was to involve the prime contractor
Raytheon, subcontracting certain elements of the development effort to one
Norwegian, one Danish, and one Italian firm. This was to be followed by two
years of a sole source production effort with Raytheon still acting as the prime
contractor, but expanding the industrial consortium to include firms from any
nations that had joined the project after engineering development had started.

This two-year period was then, according to the original plan, to be followed by

two or more production runs - each Participating Government having received a

complete production data package in the interim, which would have allowed them to

make the necessary contractual arrangements for follow-on production in their

own countries, on either an individual or collective basis. A plan was worked

out by the NSPO to maintain a central management organization to assist in

configuration control during the follow-on independent national production phase

and for the operational life of the system.

B . Cost and Work Sharing Arrangements

Total R&D costs for the project were $35 million of which 83.6% ($29,314
million) was footed by the U.S. The cost-sharing formula, by which the partici-
pants contributed to the total cost of development, was figured on a proportional
basis according to the number of systems each committed to procure through the
first three years of production. The first two years were to involve sole source

production with Raytheon as the prime, while the third year was to be the first

year of separate national production runs. This three-year span was selected to

Chapter 10

F- 15

avoid the complexities of endless updating of the cost-sharing figures as the
national plans changed over the years. Nations joining the consortium after
engineering development had started still paid their proportionate share of
development costs. Any increase in the number of systems procured would cause
recalculation of development shares, retroactive to the start of the program.

But if fewer systems than anticipated were bought by a certain country, it could

not get any of its money back.

Provision was also made for calculating cost-sharing on a subsystem basis -

missile, fire control system, and launcher - for those countries desiring only
31

partial systems. Further breakout was not allowed due to the complexity of

calculating costs, and the impact of such fragmentation on program management.

As it turned out, actual national purchases were different from those planned for
all the participants. The U.S. and Norway drastically reduced planned procure-
ments , while Italy and Denmark increased theirs slightly. After the Netherlands
came in, it later trebled its order.

As prime contractor, Raytheon not only had res pons ibil ity for management of the
cooperative development effort and the total system, but for fulfilling the
balance of payments requirements through providing compensating work to within
at least + 25% of the individual national shares of development costs, and later
of production costs. These BOP/work sharing constraints necessitated early
planning by the prime contractor as well as the NSPO. As a consequence, long
before formal program approval, a tentative network of contractual arrangements

had been worked out between the U.S. prime contractor and its subcontractors in

Chapter 10
F- 16

each of the other countries. And since the distribution of contractual effort
required a long lead time, the ruling on compensating expenditures in. each
country could not apply for engineering development to nations that joined late,
such as the Netherlands and Belgium, both of whom joined in 1970.

With one exception, all equipment was either designed by Raytheon (and later
built to print) or designed by one of the European subcontractors The program
was able to draw upon areas in which each European firm had special technical
capabilities. On a more general level, the electronics industry is particularly
well-suited for these transatlantic projects, especially those involving the

smaller national economies within the alliance, because of the limited capital

required for start up and its suitability for production by smaller firms. In
addition, most of these European firms participating in the NSSMS project had
been involved in several of the previously cited joint production projects with a
high electronics content (e.g., the Hawk, Sidewinder, and Bullpup missile
systems, and the NATO Air Defense Ground Environment (NADGE).

Two other points need to be mentioned regarding BOP constraints. First, the
computation of offsetting expenditures for BOP purposes cuts off at the second
tier of subcontracting. Second, the NSSMS arrangement, where Raytheon had total
BOP responsibility, can again be contrasted with that of the much more complex
F-16 program where such responsi bi 1 i ty was pressed down to the U.S. subcon-
tractor 1 evel as wel 1 .

C. Engineering Development

The Engineering Development (ED) phase of the NSSMS lasted approximate! y three

and one-half years, starting in September, 1969. During this period three

prototype systems were designed, built, and tested by Raytheon and evaluated on

U.S. and Norwegian Navy ships. Engineering development was performed in

Chapter 10
F- 17

accordance with the design and performance specification written by the naval
commands of the Participating Governments. The major accomplishment of the ED
phase was its having brought together the divergent engineering and
manufacturing disciplines of .the U.S. and Europe to develop and produce well-

integrated equipment without having to pay a premium with regard to cost,

schedule, or performance.

The three firms that responded to the IFB for ED were each eventually awarded

subcontracts. The Norwegian firm, A/S Kongsberg Vapenfabri kk (KV), having

developed a computer-operated fire control system for another weapon system,

developed the fire control digital computers and radar pedestals. The

Danish firm, Terma Elektronisk Industri A/S, developed the radar microwave

receiver, while the Italian firm, Selenia Industrie El ettroni che S.p.A. ,

modified a previously developed monitoring system for use as the firing

officer's display equipment. These three contracts returned around $4

million in development work, or about 10% of the R&D effort. (The Belgian
and Dutch pro rata contribution to the 16.4% non-U. S. part of R&D costs could
not be returned to their industries due to late entry.)

During 1972 and 1973, the NSSMS underwent evaluation on U.S.N. and Royal
Norwegian Navy ships. The U.S.S. Downes (DE 1070) served as the platform for
technical evaluation (TECHEVAL) and operational evaluation (OPEVAL).

Contractor demonstration and U.S.N. OPEVAL began in October 1972 and was
completed in March 1973. During TECHEVAL and OPEVAL tests, the system's
performance was qualified by U.S. Navy men as impressive, and it was able to
score direct hits and kills with an unusually high level of rel iabil ity.4^

Chapter 10
F- 18

OCTOBER 1969— Signing the $23 million NATO Seasparrow contract
is Rear Admiral Mark W. Woods, Commander, Naval Ordance Svstems
Command. Seated are (I. to r.) J. S. Walsh, Raytheon Program Manager,
A dm. Woods, J. Reid, NAVORD, Dr. J. F. Shea, Raytheon. Standing
are project office representatives from the participating countries: A.
Abate, Raytheon, Cdr. F. Tonnessen, RNN, Lcdr. P. I. Bledsoe, USN,
Lcdr. F. .Andersen, RDN, Ll A. Pescatori, IN, Capt. S. T. Counts, USN,
NATO Seasparrow Project Manager.

An innovation of the NSSMS program was the addition of an evaluation that was
carried out by the Royal Norwegian Navy. The system was installed aboard
the destroyer KNM Bergen in March, 1973. This evaluation tested the system
in a far-northern environment, with the limiting conditions of ship size
and geographical restrictions in which the Royal Norwegian Navy operates

D. Production

Originally, the two-year sole-source production phase was to begin concurrently

with OPEVAL and TECHEVAL in 1972, but, at the insistence of the European

participating governments, it was delayed until after successful OPEVAL. In

August 1973, just short of four years after engineering development had begun,

Raytheon signed the production contract with the U.S. Naval Sea Systems

Command. Allowing time for subcontract negotiation and turn-on, production

activity got off the ground in January, 1974. Production deliveries began in

January 1975 with first deliveries going to the Netherlands followed by

Norway, the U.S., Denmark, and Belgium later in the year. Deliveries began

for Italy in early 1976 and for the FRG in mi d- 1978 - the FRG having joined

the dual consortium at the governmental level only, in early 1977.

As of early 1981, the original production distribution has been maintained
with the exception of Selenia. Selenia was dropped in February, 1979 because
of price. Selenia1 s part of the work package, the firing officer's console,
was brought back to the U.S. Subsequently some of the work went back over to MBLE
Belgium, some up to Raytheon Canada (to count as offset toward a possible Cana-
dian purchase) and some work was retained at Raytheon's Quincy, Mass, plant.

For the production phase, as previously stated, the industrial consortium

expanded to involve greater European participation. In addition to U.S., Norwe-

Chapter 10

F- 19

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European Development and Production Responsibilities for the NSSMS

Company

Nation

Item(s) Development/Production

MBLE

Bel gi urn

printed circuit boards

DISA

Denmark

launcher pedestal

Terma

Denmark

microwave receiver X

NEA-Lindberg

Denmark

static frequency converter

Sel enia

Italy

firing officer's console X

(X)

Fokker

Netherl ands

launcher rail, and director
control! er

Bronswerk

Netherl ands

liquid cooler, electronic
equi pment

Kongsberg
Vaapenfabri kk

Norway

director pedestal and

digital computer X

Chapter 10
F-20

Raytheon's NSSMS Project Management office in Way! and , Mass, provides overall
management and control for the effort while the Raytheon NSSMS European office in
Copenhagen adapted the requirements to European methodology. Early on in the
program, Raytheon had a team totalling 11 men in Europe representing subcontract
management, manufacturing, quality assurance, and engineering. A Raytheon man
was originally located in each of the eight subcontractor plants to provide on-
the-spot assistance, and generally maintain close coordination and communica-
tion. The balance of 3 were located in the Copenhagen office. During the mid-
70' s the European team dwindled to one man, the Manager European office,
Copenhagen. In addition to the residency arrangement, Raytheon provided
technical, business, and commodity buy assistance from the Wayl and and Copen-
hagen offices.

As previously stated, the original plan had been to break up the industrial
consortium after 2 years of sole-source production and then proceed with indepen-
dent national production programs. This, however, did not occur and all parties
agreed to continue the program on the original single-source basis.

This led to a major increase in the BOP percentages of the European firms, well
beyond the original constraint of at least 75% of originally planned expenditures
being returned to a nation through industrial participation.

Chapter 10
F- 21

Balance of Payments Through November 1979

Qri ginal % of BOP^ Current % of BOP^

Bel gi urn

215

Denmark

156

Italy

100

150

The Netherlands

158

Norway

184

Source: Thomas E. Peterson

After the FRG's order in 1977 all participants except for the FRG were in a plus
position vis-a-vis BOP. The national orders among NATO participants were split
at about 60% of the systems being for the U.S. Navy and 40% collectively for the
European navies. As of the fall of 1979 the total contract value to Raytheon fo
the NSSMS was $300 million (excluding missiles). Within this amount the total
value of national orders by the original European participants came to $79
million.

Even though offset obligations have been more than met for all European partici-
pants, seven of the eight original European sources have been maintained. Only
Selenia has been dropped. Keeping this original team in tact has had to be
justified purely on the economic merits of the situation. The USN people at

Chapter 10
F- 22

RAYTHEON NSSMS PMO ORG

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the NATO SPO have had no problem with the foreign sources. However,

justifying maintenance of the status quo to those USN personnel and civil

servants outside the project office has' not gone as smoothly. When a
request for a quote on a new buy comes in from the Naval Sea Systems Command
(for a new customer, the USN, or an add-on to the original order of one of the
European participants), the program periodically has to get over the hurdle of
justifying the European sole sources, since they're no longer required. The
obvious point, that it is smart to continue with the Europeans, from both a
political and marketing viewpoint, is not relevant. What does the trick are
the economies of scale, the start-up costs being so far downstream. This in
itself makes prospective U.S. sources non-competitive. And of course, back
in 1973 there was a full fledged competition. With new buys coming in for

quantities of five or ten systems, going out for alternate sources just can't

be justified.

Chapter 10
F-23

NSSMS Orders

Country

Single Systems

Dual Systems—

FCS—

Transmi tter

Launcher

U.S.50

Std

Norway

651

—

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Italy

Std

Denmark

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Spain -- -- HSA 4 4

Japan -- -- HSA __2 _5

42 56 50 34

The production effort was divided such that 51% of the production of hardware was

done in Europe. The U.S. has kept its plus position with regards to BOP, because

of third country sales and other funded production activity such as project

management, logistics, installation, and systems integration and test-- the

usual areas of responsi bil ity falling to a prime contractor.

Chapter 10
F-24

In addition to regular 2-4 FMS administrative fee, all non-parti ci pating nations
that purchase the system must pay a 10% R&D recoupment fee on top of the Raytheon
sales price, one that is passed on to the- participating governments. If a
prospective customer is also a NATO member, however, it has the option of
applying for membership which would allow it to pay only a pro rata share of the
original investment and no FMS administrative fee. The application must be voted
on by the participating governments and accepted unanimously.

Since each year the price of the hardware is going up by around 10%, paying
another 10% on top of this ever growing base is a much more expensive proposi-
tion. It is therefore, considerably cheaper for NATO members to join the project
and pay only a share of historical costs. The FRG joined on this basis in 1977,
sending a permanent representati ve to the SPO and placing one on the Steering
Committee. Greece is currently considering membership, and in the interim is
sitting in on the Steering Committee as an observer.

Chapter 10
F- 25

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4. The Transnational Subcontract Management Effort

A significant element contributing to the NSSMS program's success was Raytheon's
having been allowed the time to thoroughly plan the whole international sub-
contract management and procurement effort. Consequently, contrary to the
myth spawned by the experiences of early collaborative projects, the program
encountered no measurable cost increase attributable to the requirement that
the industrial effort be multinational.

Unlike the much more complex F- 16 coproduction effort, where the management
of the numerous European subcontractors was a fractionated effort distributed
among prime contractors (General Dynamics and Pratt & Whitney), and some
20-odd U.S. subcontractors , the NSSMS involved a smaller, more manageable
number of European firms that were all first tier subs to Raytheon. This
allowed Raytheon to centrally manage all of its subcontracts and minimize
most problems impacting on cost. Under the heading of "International Subcontract
Management Considerations" in his spring 1977 vue-foil presentation at Wright-
Patterson AFB, Peterson summarized the major worries expressed when the Europeans
were initially contacted by Raytheon to participate in NSSMS.

These considerations were:

— European industrial/technical capability;

— Industry/government/steeri ng committee relationships;

— Concern for U.S. material procurement;

— Apprehension as to adequacy of supplied data package;

— Uncertainty over engineering changes;

Chapter 10
F-26

— Familiarity with Q.A. and standardization procedures;

— Business controls;

— Imposition of ASPR requirements;

— Concurrency;

— Escalation

— Assistance,

Resi dency ,

Commodity Buy,

Technical Business;

— Communications.

Peterson's commentary on the above issues in a letter to the author was a terse,

I am pleased to report that each of these worries has been alleviated,
and that the situation is, in fact, one of a joint international
industrial team working in such a way as to make any efforts ...
centered on the DoD and its RSI policy ...look juvenile.

In the way of further explanation on this latter point, Peterson stated,

My comments ...when I made them, are more borne out of frustration than
fact. It is my firm belief that left with only the requirement,
industry will accommodate a multinational offset coproduction, or
whatever you want to call it, to the satisfaction of international

industry who in effect should be the only party to be pacified. It is

the Government's zeal to manage this activity each step of the way that
I consider unenlightened. . . .The U.S. government is so busy telling
industry what to do, that it is not listening to what they want to do.

Peterson evidently feels that, in the achieving of an adequate balance between
government and industry in their roles of encouraging and managing such collab-
orative projects, the weight should fall more heavily on the side of industry,
with less reliance being placed on governmentally imposed schemes and direction.
The NSSMS project provides us with an example of how government and industry have

been able to work successfully in the past along these lines, while its follow-

up, the Seasparrow Lightweight Missile System (SLMS) provides us another model of

Chapter 10
F- 27

M.M.

how industry can go even further, in the future, in assuming res pons ibil ity for
initiating and managing such transnational projects.

A. The Issues of Cost and Source Selection

In a 1971 report by Jack N . Behrman, prepared under contract for the U.S.
Department of State, entitled Multinational Production Consortia: Lessons from
NATO Experience, five projects were examined, one of which was Seasparrow. The
other four included the Hawk, F-104G Starfighter, Sidewinder, and NADGE pro-
jects. From this rather limited data base Behrman compared their respective
experiences in each of those aspects of a project over which agreement must be
negotiated by the participating governments, while reaching a mutually accept-
able tradeoff between efficiency and equity--a fundamental conflict. These
aspects included:

problem definition;

system design, bidding, and procurement;

financial commitments;

balance of payments;

allocation of production;

company selection;

costs and pricing;

organization and management;

technology transfer (dissemination and protection);

development;

taxes and duties;

Chapter 10
F- 28

1 egal aspects , and ;
follow-on.

From among these areas two of Behrman ' s conclusions concerning the Seasparrow

project--at that time still in engineering devel opment--were refuted by

Raytheon’s NSSMS assistant Project Manager for International Operations,

Thomas E. Peterson. First of all, under 'Allocation of Production,' Behrman

cited the NSSMS as an example not only of the necessity of cooperation, but also

the common problem of the extra costs involved in cooperative development.

Cooperative development will probably be needed in mosts cases in the
future to make certain there are equal possibilities to develop
specialized production capabilities in each major new field. This
move, however, merely pushes back one step the question of who
specializes in what--decisions now made at the R&D stage. These deci-
sions are not made easier by cooperative undertakings; they are,
rather, much more difficult and tend to set a pattern of future costs
that may be much higher than necessapy--as evidenced by the allocation
of development under the Seasparrow.

In response, Mr. Peterson emphasized that not only had there been no discernabl e
cost increase over a purely domestic project, but a number of key U.S.N. people
have stated that European participation has meant that the cost of Seasparrow
systems to the U.S. has actually been lower than would have otherwise been the
case .

A second quote from Behrman 's report cited the Seasparrow project as also being

illustrative of the general problem of source selection.

The Seasparrow program illustrates the difficulties created when
companies are selected by governments as sole-source suppliers. Each
then knows it is the only source for some piece of equipment; what it
may not know is which piece. The prime contractor, or the consortium,
may ask for bids from several potential suppliers, but as the various
companies are selected, the few left know that they must be the source
for remaining subsystems or pieces. Their bargaining power is
enhanced, and difficulties arise in coming to a firm pri ce--at least
one reasonable in the sight of all governments. It is not in the

Chapter 10
F- 29

interest of the government of the recalcitrant company to force a
reduction in the company's bid. 56

Although, as with the previous Behrman quote, this is a common problem faced
in joint development projects, Raytheon's Mr. Peterson was again quick to
point out that, to the contrary, the NATO Seasparrow project actually proves
that such problems can be minimized or even avoided, and are not necessarily
major obstacles to collaboration.

As previously covered, Raytheon was selected in 1969 by the four original
Participating Government's after an engineering development competition with
13 other U.S. firms. Raytheon then selected 3 European firms to participate
in engineering development, receiving in all about 10% of the work.

In 1973, in addition to continuing with these three, Raytheon selected another
five European firms for the production phase. Within the slack provided by
75-125% BOP rule Raytheon was able to run an effective group wide competition,
soliciting bids in each country for 2 to 4 times the amount of the required
offset. Raytheon put together 7 or 8 collaborative production packages
ranging from very high to very low European participation along with the
corresponding price tags. In the end the Steering Committee selected a
package in the middle ground, one in the range of an average of a 90-plus
percent offset.

During source selection, Raytheon would ask the governments who they should
talk to, specifying the required capabilities (which in the case of the
national industries concerned were a good fit for the system); but in no case

Chapter 10
F-30

was Raytheon ever flat out directed by a government to a given source,
although sometimes they were nudged or veered. In Norway, even though KV had
been an obvious choice to be the Norwegian participant from the beginning,
Raytheon selected KV ' s computer independently of this constraint. Even though
there was only one case of an in-country competition (between Belgium's MBLE

and ACEC ) , Raytheon was able to maintain adequate leverage over source
selection. In addition Raytheon obtained quotes from both U.S. and European
firms for subcontract items, with all European quotes having been compared to
U.S. quotes.

Raytheon has avoided directing European subcontractors to U.S. sources
although the U.S. supplied drawings do reference a U.S. supplier, which are

often resorted to.

B . Centralized Subcontract Management: The Procurement Agreement and the
Lack of an Interceding Layer of U.S. Industry
The fact that three of the European firms developed the equipment they were
later to produce, plus all production being single source, have naturally both
contributed to a lowering of costs through their favorable impact on
requirements for tooling, test equipment, training, and so forth. However,
there are two other aspects of the way in which this subcontracting effort was
set up that are particularly noteworthy.

A study was made in the initial stages of the production program of the cost
problems faced by the European subcontractors in their offering of competitive
bids. It was discovered that most cost increases encountered were a result of

Chapter 10
F- 31

the smaller orders and many agents involved, and particularly with largest bulge

being in material prices. As such Raytheon decided to pool the effort;

at a cost of some $2 million, but with initial savings of some $20 million
59

dollars. This involved:

Raytheon's offering of "purchasing assistance" to all European bidders,
with particular emphasis on SCD0U pricing;

a "company wide" agreement and quantity buy prices being made available;
a large percentage of material being procured in the U.S. by Raytheon and;
the implementation of a commodity buy technique.

While the above approach contributed to a major reduction in the costs faced by
the European subcontractors , another aspect of the structure adopted reduced
added costs at the next level up in the effort. Through the centralization of
the subcontract management effort allowed by all the European firms being first-
tier subcontractors , the NATO Seasparrow program was able to avoid another cost
that has impacted other transatlantic efforts (i.e. F- 16 and NATO AWACS) wherein
a U.S. industry team has subcontracted a share of the work to the industries of
European customer governments. This involves the issue of loadings, or mark-ups,
placed on second-tier European work packages by the first-tier U.S. subcontrac-
tor. Though these mark-ups are totally legitimate within the context of a U.S.
led joint program wherein the U.S. Cost Accounting Standards apply, they tend to
add a sizeable premium to all second-tier work placed in Europe. These loadings
are DCAA approved factors tailored to a given contractors accounting system
and business base, being added on to the base price negotiated between the
U.S. first-tier subcontractor and the second-tier European one. As pooled

Chapter 10
F- 32

costs applied across a wide range of U.S. government defense contracts and
with considerable variance from firm to firm, their suitability, when looked
at in isolation for a given transnational project, is somewhat questionable
from the view point of the particular grouping of customers. These loadings
for other programs have often run in excess of 100% mark-ups where U.S. first
ti er— European second tier subcontractor teaming is involved. ^ Raytheon, as
the only U.S. firm dealing directly with the European subs, however, has been
able to apply a minimal mark-up of around 15%, one which covered a modified G
& A rate, material handling and profit, and has been much more palatable to
the customer(s).

C. RFPs

The above arrangement whereby the Raytheon NSSMS program was able to obtain
permission to extend company wide procurement agreements to European
suppliers, additionally contributed to the elimination of what would have been
the most time consuming impediment in proposal preparation. The fact that the
Europeans usually did not have to in turn go to the U.S. vendors, allowed for
a very rapid response time.

In the beginning of the program when the Europeans were still a bit leery,
there was somewhat of a turn-around time problem, but it never totaled more
than three or four months. At this point in time, there was a great deal of
management control. Over time, the situation has evolved to one wherein
Raytheon is able to obtain verbal commitments over the telephone within 24
hours and fully detailed responses with all data required by DD Form 633

Chapter 10
F- 33

within 30 days. It took 2 1/2 years into the production program before the

European subcontractors could be turned-on by a TWX and 5 years before responding

to simply a verbal turn-on over the telephone. Being medium and small size

firms, they are generally heavily dependent on their banks for working capital,

so this RFQ/proposal turn-around time issue was also related to a certain

fi?

evolution of attitudes on the part of the banks.

Periodically, when a significant problem area that is holding up a proposal has
been targeted, Raytheon sends in people to explain, provide additional data, and
clear up the concern. Though this is common to any standard subcontract manage-
ment effort, the need for this tends to occur more frequently in transnational
enterprise, as one might expect, especially early on in the program.

Initially the program went through a difficult gestation period prior to produc-
tion go-ahead in August 1973, with the customer constantly changing specs and
initiating delays. At this point, Raytheon was expanding from a base of three
European firms participating in development, to eight for production. After six
months or so of this, Raytheon was facing European demands for money, if the
firms were to continue to participate in the competition. Eventually, a number
of the Europeans dropped out, frustrated by the constant revision of RFQs.

Though US defense firms were used to operating in this environment, for virtually

all of the European firms, this was their first experience as participants in a

fil

US government managed development and production program.

Once the production contract was finally awarded in August, 1973, all purchase
orders were negotiated within the following 30 day period.

Chapter 10
F-34

D. Flow-down of ASPR

At the beginning of the engineering development phase the U.S. government recog-
nized the need to waive the flow down of 20-odd ASPR clauses, with the contrac-
ting officer having been given a charter to work the waiver of any others that
became problematic. This only amounted to a handful of additional clauses, and
in- general , once adequately explained, the European's were able to live with most
of the remainder. The process worked fairly smoothly and once waived for the $4

million dollar segment of the engineering development effort placed in Europe, it

was extended to the much larger joint production effort.

Jim O'Brien, the program's subcontract manager cited three representati ve cases.

In one case a European subcontractor hired a major U.S. law firm to deal with

questions such as patent clauses over which they were very uncomfortable. This

quickly became rather expensive. Finally Raytheon told the firm, "look its not

going to be a problem. And we're not going to sit down and spend several days

working this issue. We're not going back to the government on this. What you've

got is simply a lawyer running around surfacing issues and creating business for

himself." The European firm accepted this and decided it could live with the

clauses. No problems have occurred since over issue.

In another case involving industrial property rights Raytheon was able to display
greater flexibility, since they felt the European concerns were warranted. A
European subcontractor protested the right of the U.S. government to drawings for
tools and test equipment emanating from its engineering development work, which
were not covered directly under the development contract, but were subcontractor
provided. Recognizing the concern as legitimate, Raytheon and the contracting

Chapter 10
F- 35

officer agreed that instead of modifying the several boiler plate clauses con-
cerned it would be better to just add a new clause that stated that the customer
governments would have no rights to the firm's drawings. This settled the
matter

In yet another case, Selenia, which was destined to become the sole Italian
subcontractor , sent over a lawyer who virtually wanted to rewrite ASPR. After
several days of dealing with him, Raytheon simply said, "accept them or forget
the whole thing." Selenia accepted. ^

E. Communi cation/Authori ty/Visi tati on

The fundamental rule in the interrelated areas of communication, authority, and
visitation, in the words of Mr. Peterson, was simply, "Keep the Face Common."
First of all, this contributed to the establishing of close personal ties that
allowed for easy bridging of any gaps resulting from the language barrier (i.e.
one of the parties having to work through a second language). "Consistency is
the key, if they keep with one person, it'll get through." Moreover, both sides
must make clear the level at which decisions are made and never circumvent it.

"In extremis," Peterson said, "I'll take you to my boss, and you can hear it from
him, but I'll be there.

Peterson and O'Brien are the only two Raytheon representatives with contract
authority with the possible exception of their sub-contract administrator on
site, Wilbur Cartwright. Mr. Peterson flew over to Europe on an average of once
per month, spending 40-50% of his time over there, while Mr. O'Brien went over

Chapter 10
F- 36

about 3-4 times a year (e.g. after a number of technical changes have

accumulated). Ordinarily, Cartwright, based out of Copenhagen, performs the

fact-finding/cost analyst functions, generally laying the ground work prior to

negotiations. But if the contract is a minor one (say in the $10,000 to $50,000

range), Cartwright is the negotiator. Otherwise Peterson and O'Brien were the

only two subcontract interface points for decision-making/commitments for the

program in Raytheon. This has allowed for an almost air-tight subcontract
69

management effort.

The need for this approach was further reinforced by the organization of their
European counterparts . Peterson and O'Brien found that the European firms
followed a very strict pecking order with regards to commitment authority.

Though they put a guy in a position where the outside world would believe he has
authority, in fact their negotiators are kept on a very short leash. No written
rule is involved, its just practice. Therefore Raytheon Seasparrow buyers work
through their counterparts on day-to-day administrative matters, but for deci-
sion-making and finalizing negotiations, all commitments are made by Peterson
and O'Brien.^

Peterson spoke of his surprise early on in the program when one of his buyers
and a European counterpart reached an impasse in a particular negotiation
wherein the European would not agree to any more than a 1% decrement in the
original proposal. After he was forced to intervene, he found in talking to
the program manager that a commitment for a 1 or 2% decrement is all the
authority the contracts administrator was ever given. Once they became
involved, the respective managers were able to rapidly close the gap.

Chapter 10
F-37

Peterson soon found this to be the rule everywhere. Additionally, they found

that even program managers generally only had limited authority, and that it

was necessary to go several levels higher in management to a Director,

Vice-President or even the President. This in turn required an elevation at

Raytheon up to the assistant Program Manager, International Operations^.

Initially however, it did take some time for Peterson and O'Brien to locate

the critical decision maker in each company.

Jim O'Brien cited a typical example of the differing authority structure. As
is common practice in updating a proposal due to a slide in the time limit for
an original price commitment, the European subcontractor often wouldn't go out
again for another round of bidding due to the cost and time involved. Instead
they would simply rely on an estimate. It was necessary, however, to first
bump the estimate far up (by U.S. standards at least) in the hierarchy for
approval

Inter-rel ated with the above points has been the need to maintain very strict
visitation control within Raytheon. The NATO project office assumed the role
of providing clearance for visitation. This has allowed for a degree of
control over the travel of high level personnel at Raytheon who were outside
of the program, to European subcontractors , and thereby minimized the
potential for program disturbance through any commitments from this source.

In contrast, the F- 16 program did not follow this practice and was reportedly
having problems in this area.

Chapter 10
F-38

Early on in the program there were incidents of European subcontractors circum-
venting Raytheon as prime and going directly to the customer through their
national representatives. But after several problems early on in the program,
Raytheon was able to make it clear that, "if your having problems come to us, not
the customer," (and this, without having to jump all over the subcontractors , as
they would have in a purely domestic program). Raytheon was greatly assisted in
this task by the NATO Program Manager's knowing to stay out of the inter-
industrial relationship side. When European subcontractor complaints came in
through national reps on the Steering Committee or at the SPO , that was the end
of it.74

F. Subcontractor Meeting

Yet another example of the rinkles introduced into a project where transnational

enterprise is involved, can be seen in the project's bi-annual subcontractor

meeting, or industrial symposium. Following up on a suggestion of Fokker's Vice-

President for Contracts and Industrial Marketing, the late Cornelius Ponsen,

Raytheon set up in March, 1974 a parallel industrial counterpart to that of the

Steering Committee; meeting at the same time and place as the Steering Committee

(which were initially every 3 months, but as the program matured, occurred

only every 6 months). Raytheon's original position on this matter, however,

was simply, "no way." Raytheon intended to continue to be the only industrial

member at Steering Committee meetings as it had throughout Engineering

Development. Absolutely no subcontractors were to be present. Raytheon

feared that its authority would be seriously compromised, vis-a-vis both the

7 R

customer and the subcontractors themselves.

Chapter 10
F-39

Raytheon finally did agree, several months after the suggestion had been made, to
hold such a symposium, though not without some reluctance. They soon found
however, that their fears were totally unjustified. National and firm loyalties
and pride, and just plain good sense, inevitably kept the subcontractors from any
such temptations.

Raytheon initiates the subcontractor meetings by delivering the report just pre-
viously given to the Steering Committee. After this, the meetings review a host
of issues covering not only program management, but joint marketing of the NSSMS,
as well as development and marketing of the- fol 1 ow-on system, the Seasparrow
Lightweight Missile System (SLMS). It is worthy of note that, paralleling Boeing
experience with the NATO AWACS projects, Raytheon found it necessary to stop
inviting higher management, from Raytheon as well as the European

subcontractors . Only then, with program people only present, was a really free

7 6

and productive exchange and sharing of problems able to develop.

In spite of this evolution towards more of a team approach, when Raytheon is one-
on-one with each of its subcontractors at their own plants or in Wayland, the
prime-subcontractor relationship basically continues on a normal basis, though
occasionally Raytheon does feel the need to reassert its authority.

Consequently, over time, these meetings have played an important role in the
inter-industrial relationship becoming somewhat more that of an associate rela-
tionship. They have contributed to the evolution of the good working rela-
tionship established during engineering development and production, into one
which includes not only joint marketing of the NSSMS, but joint design, develop-

Chapter 10
F-40

ment and marketing of the follow-on Seasparrow Lightweight Missile System. (The
SLMS is treated later in this sub-chapter.)

G . Imposition of Management Systems

For the most part Raytheon followed a policy of, at least initially, letting
their European subs use their own internal systems. Then, once problems sur-
faced, the Europeans were very receptive to Raytheon's offered improvements.

This was especially prevalent in the area of quality control, where Raytheon
systems were usually eventually adopted in their entirety.^

The one exception to this involved Selenia, the Italian participant. In the case
of Selenia, it would have been a serious problem if they had been allowed to
start out using their own systems. Luckily though, Raytheon was a part owner at
the time, so imposition of its systems involved little difficulty.

H . Plant Surveillance and Audit

For the NATO Seasparrow project, primary res pons i bil i ty for site surveillance
falls to the national quality assurance and audit authorities. There is a
regular delegation of authority for contract administration, audit servi ces ,
inspection and so forth by the U.S. services, i.e. DCAS and DCAA. For example,
during the proposal stage the NSPO in Washington, D.C., instructs the local DCAS
in Massachusetts to look at the given work package, and to do what they can with
the data available at Raytheon. For the balance of the effort that can't be
dealt with state-side, the DCAS office will ask for an assist from the DCAS and
DCAA offices in Frankfurt, FRG. If people are available, then the Frankfurt

Chapter 10
F- 41

office will deal with it. However, more often than not it will not have the
78

manpower .

Similar to internal processes within the U.S. government in requesting an
79

assist, the Inspection Branch of DCAS in Frankfurt, to take one example,
usually requests support from one of the European national quality assurance
services, after first informing the given MOD. The national service will usual!
provide a resident inspector to assure that good quality practices are being
followed (e.g. segregated inspection for incoming hardware, or the proper
calibration of tooling). And again, as in the U.S., if no people were available
Raytheon might be asked to fulfill the function, if the subcontractor will so
allow.

DCAS or the DCAA does become directly involved periodically if people are avail-
able, as in the case of a recent audit for the SLMS launch canister developer
involving the Dutch firm Bronswerk. As for the level of audit to which the
European subcontractors permitted Raytheon to go (beyond which the DCAA or one
of its European counterparts would have to carry the ball), Jim O'Brien
reported that there was no discernable difference with that of U.S. subs.

Similar to U.S. firms, this was basically a function of the work package, the
size and capability of the firm, and how bad they wanted the business. In any

event, the facilities and technical evaluations usually tells a prime

contractor what it wants to know about a prospective sub. Since the
beginning of the production program in 1973, the European books have looked
like any U.S. defense contractors books as far as the availability of detailed
cost data is concerned. The detail either Raytheon or the DCAA Frankfurt gets

Chapter 10
F-42

is complete. The program was further assisted several years later by the F- 16

program with its imposition of CAS on the common subs.

I . Customs Duties and Tariffs

Although the MOU and the prime contract provided for the waiver of custom

duties, implementation was sometimes another matter. For those cases where

delivery was critical and a snag occurred, Raytheon adopted the practice of

paying duties upon entry of an item into a given country, and reimbursement

upon re-export. Pursuing reimbursement by the responsible corporate office

was naturally a function of the amounts involved. Problems occurred

primarily: (1) early on in the program; (2) when shipments entered nations at

other than the established port of entry; and (3) when Europeans occasionally

procured certain U.S. vendor items from domestic distributors. Raytheon has never really

of money, and the frequency of occurrence has diminished over time.

In the area of customs duties and tariffs Raytheon relied on European subcontrac-
tors to each work with their respective governments in implementing the waiver.

Over time, customs officials in the ports of entry gradually became familiar with
the case, thereby speeding up clearance. In addition, it is worthy of note that

this has always been less of a problem in the two smallest participating nations,

Norway and Denmark; the problem being in good part a function of size.

Problems arose when shipments did not enter at the designated national port of
entry for the program (e.g., Brussels for Belgium, but arriving at Ostende
instead), or when the shipment of a part of the pedestal was expedited to
Raytheon's Bristol, Tennessee plant, but the flight landed at the Knoxville,

Chapter 10
F-43

Tennessee, airport instead, due to bad weather (the three U.S. ports of entry are
for the program Boston, New York, and Bristol).

The third case would arise when MBLE, to take one example, would buy a number of
Motorola semi-conductors from a Belgian distributor for around $50 each for
reasons of timeliness, instead of resorting to the more time consuming process of

©A

ordering the parts through the normal channels from the U.S. for $35 each. In
such a case part of the price difference could be accounted for by the Belgian
distributor's having already paid the tariff upon Import into Belgium.

J . Miscellaneous Financial Issues

The NSSMS foreign currency payment system is a relatively simple, yet successful
one. As is common policy, the project had a mechanism for insulating the
contractor and its subs from gains or losses due to currency fluctuations. The
governments collectively assumed all risk in this regard, Indemnifying the con-
tractor against any movement between the fixed contract payment rate and the
variable actual (i.e. market) rate, periodically settling accounts. Raytheon is
responsible for: 1) paying its European subcontractors in their own currencies,
and 2) the tracking currency fluctuation effects for the second tier subcon-
tracts

European payments to the U.S. government, as well as all payments to Raytheon,
are in dollars. Raytheon, in turn, paid the European subs in local currencies at
market rates. The cost or gain due to any change in the original exchange rate is
shared by the participating governments, through their agent, the U.S. Navy,
there being no net effect on Raytheon or the other contractors.

Chapter 10
F-44

A quarterly price adjustment to the prime contract is made to cover the currency
fluctuations. The contract price is based upon May 1, 1973 exchange rates. Any
price adjustments made because of currency fluctuations experienced at the first
and second tier subcontractor level may change the target cost and ceiling price,
but not the profit provided for in the Raytheon contract. Raytheon actually
procures the proper foreign currency as it is needed to make subcontractor
progress and final payments. Raytheon maintains a separate corporate office to
take care of currency requirements for all of its foreign contracts. Purchases
of currency are made based upon subcontractor performance or delivery dates.
Raytheon, as well as the subcontractors, maintain complete records on all trans-
actions on the subcontract, including dollar payment and exchange rate obtained,

date paid, and the difference from the fixed rate. The quarterly adjustment -is

subject to audit by DCAA.

One lesson learned from the NSSMS experience in the area of foreign exchange

cited by Mr. Peterson, is that it would have been better to have pegged the

original contract exchange rate to an historical average than the rate on an

arbitrarily designated date. For the NSSMS project the former approach would

have involved less of a swing between the periodic settling of accounts.

In another area, any changes to Raytheon drawings that effects its European subs,
or requirements for other out of scope services that would generate an SCP, are
charged to Raytheon at agreed to rates. The previous practice for most European
subcontractors had been to treat such changes as indirect charges covered in
overhead, but when the NSSMS project came along, with the uncertainty and design

Chapter 10
F-45

fluidity inherent in defense contracting (the first significant defense program

for several of them), they decided to follow the safer route of direct charge.

As in other later transatlantic programs , the European subs protested the
standard U.S. practice of making only 80% progress payments against actuals,
and the strain on working capital this entailed. They did accept it however,
and have learned to live with it, for this program at least.

A related issue, provides us with an example of the informal mechanisms this

program was able to resort to because of its lower visibility. Since one of

the European governments had to not only obligate their money by the end of

the year, but spend it, something had to be done with excess funds prior to

their being accepted by the U.S. Treasury. The program operated, however,

outside of the FMS system. Consequently, it was decided that an interest

bearing pass book account would be set up in the name of the NSPO program

manager where such funds could be provisional ly deposited.

K. Scheduled Delivery of Hardware

Raytheon is now finding that it is much easier to get overtime work and work

on holidays and vacations, than ten years ago. Nowadays, if there's a real

problem Raytheon can get a small force in to break the log-jam. This has been

a recent evolution over the last several years. Previously it was simply out

of the question. There would be difficulty, however, if Raytheon ever tried

to obtain overtime work to the extent it is resorted to in the U.S. Moreover,

obtaining concurrence from the Europeans for extra work is possible only when

they're behind schedule; for acceleration it is still not possible. Italy

Chapter 10
F-46

was the only exception to this evolution, in that overtime is still out of the
question under all circumstances. With the engineering development program
having been a joint effort, by the time the production program came along in
1973, Raytheon had al ready been disabused with regards to the European socio-
labor environment (e.g. a shorter work year, and only 1-shift at most plants).
There was to be one rude surprise however in the area. That involved the

extent to which overtime earnings are discouraged; overtime’ earnings being

taxed at a rate higher than for standard hours.

Since the NATO Seasparrow program is now a mature one, the No. 1 schedule

problem for their European subs results from US vendors no longer producing

certain Raytheon Furnished items (CFP). Responsibility for working this

problem, however, falls to Raytheon who tracks down alternate sources and

expedites delivery.

L. Technology Transfer

Following is a sort of checklist, along with Mr. Peterson's responses,
covering some of the standard problem that arise during technology transfer
programs , be it to subcontractors or licensees.

(a) During the transfer of technology how successful was Raytheon in avoiding
inundating its subcontractors with unnecessary engineering data, while
also avoiding gaps in the data sent (drawings, documentation, whatever).
Any particular cases?

Chapter 10
F-47

Gaps were the problems, not excess. We assumed that they had all
the referenced specs, procedures, etc. We later had to supply each
with a full set of Mil specs, standards, and so forth.

(b) The extent to which original estimates were on target as to the amount and

type of training required at the European subcontractors , and Raytheon's
success in strengthening its capabilities in certain areas to offset any
correspond!' ng weaknesses of the European subs?

Since the manloading (parti cul arly Raytheon) was properly budgeted, it
was on target.

Yes .

(d) Was Raytheon able to staff resident teams and get them in place early
enough?

Yes .

(e) Did coordi nation/ communi cation between resident teams and program manage-
ment at Way! and go smoothly? For example, how successful have you been in
dealing with the natural tendency of resident teams to operate as a separate
entity, or functionals to communicate in a vacuum, divorced from program
management?

Chapter 10
F-48

My ocean hopping helped keep islands from being formed*

(f) Were there any facility approval problems (e.g. initial approval followed
by required changes)?

Yes , but no bi g deal .

(g) Any other technology transfer issues of note?

Aluminum welding was an area totally unknown in Europe at the outset.

We had to train all the subcontractors .

M . Thomas Peterson's priori ti zation of factors contributing to the success of

• the transnational subcontractor management effort.

In response to the author's query as to, "What would you say was the single most
important factor contributing to the well set up and managed NSSMS subcontract
management effort? How would you prioritize the remaining factors?" Mr. Peter-
son responded as follows:

1. Contributions of key actors,

2. All European subcontractors were first tier,

3. A good technology fit for the European industries involved,

4. Raytheon was their customer and not their Navy, and their navies made that
fact known,

Chapter 10
F-49

Enough time for proper planning, since the Development Phase (Inter-
national) proceeded prosecution,

6. Less visibility enjoyed by a medium size program.

Chapter 10
F-50

5 . Logistics Support

As seems to be the norm, even for jointly developed systems, the possibility of
using any of the NATO Maintenance and Supply Agency's (NAMSA) range of services
for follow-on support of the NSSMS was never seriously considered (at least up
until recently). As pointed out in Chapter 4, even if considered at an early
enough stage, where one nation has a dominant position with regards to the
development and production effort, it is often simply more cost effective (though
not necessarily so) for the other procuring nations to plug into that one
nation's logistics system on a bilateral basis.

Such was the case with NSSMS, except that there was also a multilateral MOU

signed that granted blanket approval for third country transfers within the NATO

98 A

Seasparrow community for spare parts. Spares are procured for all customer

Navies by the USN's Ship Parts Control Center (SPCC), Mechani csburg , PA. The

SPCC goes out directly for bids to the firms of all participating industries.

The Seasparrow's principal logistics support problem was related to getting the
SPCC, to the point where it would start up support capability. The SPCC insists
upon a 95% rate for items where the design has been fully stabilized, before it
will start up support for a system. For some 2-% years the system hovered
between 88% and 91% and Raytheon unexpectedly found itself having to do its best
to provide the support itself to the several navies in the interim.

As of mi d- 1981 the Europeans were once again discussing the setting up of a
European depot for the maintenance, overhaul, and repair of the NSSMS. The
Netherlands has been the principal nation pushing the concept and Den Helder, in

Chapter 10
F- 53

the Netherlands appeared to be the top choice. It's hard to say whether they
will finally follow through. In addition, NAMSA has entered the picture,
offering its services to the interested nations. Whichever approach is adopted,
each nation will have the option of tapping the U.S. or the European depot for
individual services. Such a depot would also offer the possibility of German and
Greek industry assuming a role in the program.

Interrelated with these developments, the NSSMS is also involved in the on-going
effort to implement the logistic support part of the NATO Long-Term Defense Plan
(LTDP) drawn- up in 1977. Forward area ordnance support bases are to be estab-
lished for the U.S. Atlantic fleet since there is currently no in-theater
capabil ity/facil ity in the eastern Atlantic area for accomplishing minor mainte-
nance, exchange of components, or conducting ready for issue tests of modern
sophisticated weapons. During a prolonged period of advanced readiness or
hostiities many of the USN's missiles and torpedoes would have to be shipped back
to the U.S. for relatively minor repairs. Bi-lateral arrangements have been made

with the UK, the Netherlands and Iceland; while SACLANT has submitted projects

within the framework of the NATO Infrastructure Program , to provide or improve
support facilities. These projects include maintenance facilities for the NATO
Seasparrow and Harpoon missiles, an advanced underwater weapons laboratory, and
a torpedo workshop and missile checkout facility.100

Chapter 10
F- 54

6 . Sequel to the NSSMS - the ASPIDE, RAM, AND RIM-7M Missiles

There have recently been three other ordnance related developments involving
the NSSMS that serve to portray an image of an ever more complex network of
inter-allied projects:

(1) The Italian As pi de missile is being unilaterally developed as a
replacement for the RIM-7H missile, for use with the NSSMS PCS and
1 auncher ;

(2) The Rolling Airframe Missile (RAM), involves unilateral development on
the industrial side in the U.S. by General Dynamics' Pomona Division
under contract to the Naval Sea Systems Command. It is being jointly
funded by the U.S., the FRG and Denmark under an MOU signed by the three
governments, to be followed by multinational production. The RAM can be
fired from either an NSSMS launcher or a stand-alone launcher.

(3) The RIM-7H is being replaced by the RIM-7M for the U.S. Navy.

A. As pi de

The Aspide missile has been developed by the former Italian member of the
NSSMS team, Selenia, to eventually replace RIM-7H for the Italian Navy. The
Aspide has a Sparrow body and is mechanically directly compatible with the
NSSMS launcher, from which it was successfully fired by one of the Italian
Navy's LUPO class frigates in July, 1979. Four frigates of this class in the

Chapter 10
F-55

Italian Navy currently equipped with the NSSMS system are scheduled to replace
their RIM-7H missiles with the Aspide.

Spain is also currently acquiring the NSSMS to be used in conjunction with the
Aspide missile.

B. RAM

The Rolling Airframe Missile (RAM), designated XRIM-116A, was, designed to meet
the requirements of the U.S., the German and Danish navies for point defense in a
high threat environment. The system can be traced back to the U.S.N.'s Dual-Mode
REDEYE (DMRE) missile program. The DMRE feasibility and demonstration program
was initiated in June, 1972. The DMRE program involved a joint effort of the
Applied Physics Laboratory of John Hopkins University (APL/JHU) and General
Dynamics' Pomona (GD/P) Division under contract to the Naval Sea Systems Command.
The FRG joined the advanced development program in July, 1976, agreeing to pay,
with a contribution of $7.4 million, about % of advanced development costs. GD/P
was selected as prime contractor, with APL/JHU designated as technical support
agent. The cost-plus-fixed-fee contract was executed with GD/P in February,

1977. In June 1979, following ratification of an MOU by the U.S., the FRG, and
Denmark covering joint funding of development to a common requirement under the
guidance of a NATO Steering Committee, GD/P was awarded a $94.8 million contract
by the Naval Sea Systems Command for full-scale engineering development of the
RAM.

Chapter 10
F-56

RAM is among a group of weapons intended to engage targets which have either
survived area defense weapons, or those which suddenly pop up at close ranges
such as those fired from submarines.

RAM missile is intended to bolster ship defense systems by adding firepower in
defense against antiship missile attacks whi ch could be launched from surface
vessels, aircraft or submerged submarines. Modes of attack could range from
high-diving to surface-skimming missiles, but initial (Block 1) Ram missile
development will focus primarily on the low-level attack, which is considered the
prime threat because of the short advance warning it provides. ^

On larger ships, the system would be aimed primarily at stopping missiles that
have slipped through combat air patrol and long- and medium-range missile defense
systems, or those that have been launched close-in by submarines to avoid area
defenses. The missile also could be used as a primary weapon system on small
vessel s ,102

RAM will be able to be fired either from existing NATO Seasparrow launchers, or
from a low cost lightweight stand-alone launcher being developed by GD/P. RAM
does not require a separately developed FCS.

The stand-alone launcher is a Model 0 system, utilizing a 24-cell launch unit

which would have about 90% commonality with the Phalanx automatic gun system.

103

The Phalanx system is also produced by General Dynamics for the U.S. Navy.

Chapter 10
F- 57

RAM alteration of the Navy eight-cell NATO Seasparrow launcher would include
the same control components, but would launch RAM missiles from two inboard
cells of

the launcher. Five Ram missiles would be loaded in each of the two inboard cells

104

in addition to single Seasparrow missiles in each of the other launcher cells.

The typical number of launchers envisioned for operational use would be two

for ships the size of a German frigate, and perhaps four — one at each corner

105

— for a ship the size of a U.S. aircraft carrier.

The missile is based on the Navy's AIM-9L Sidewinder air-to-air missile, but
has a rolling airframe to reduce control section costs, and dual -mode guidance
to increase operational flexibility in poor weather conditions.

RAM motor and ordnance package are similar to the AIM-9L, but the RAM has a
new autopilot, radio-frequency guidance receiver, two radio-frequency

antennas, two rectangular fixed wings and two control surfaces in its control

. 106
package .

Passive guidance systems will enable the system to react quickly to multiple

107

targets during a missile barrage.

The rolling airframe concept was applied to the RAM missile to minimize system
cost and weight and increase operational reliability, officials said. The
concept, which has previously been used in the 2.75-in.-dia. Army/General
Dynamics Redeye and the Army/General Dynamics Stinger missiles, requires two

Chapter 10
F- 58

instead of four control surfaces and half the usual control electronics. The
rolling motion is induced by four small guide rails in the missile's launch
canister.

To date, Belguim is the only other member of the NATO Seasparrow consortium to
express serious interest in RAM, and it may join the NATO Project Steering
Committee as an observer.

This development project will last approximately four years, and will be followed
by a production decision. The anticipated initial delivery date is 1984. The
RAM is expected to deal with the threat through the mid- 1990's . Navy sources
have indicated that the total value of the program would be in the neighborhood
of $1 billion of which between $600 and $700 million would be for production.

Unlike the NATO Seasparrow program, the RAM development program is a purely U.S.
industry effort. However, German, and possibly other European industry, is
expected to come into the picture during production. GD/P has been discussing
various production arrangements concerning the stand-alone launcher with a
German consortium including Dornier, VFW, MBB, and AEG-Tel efunken , to offset the
FRG's order.

The FRG will procure the RAM with a stand-alone launcher, while the other nations
are expected to use the eight-cell NSSMS launcher— two of which will be fitted
for RAM.

Chapter 10
F-59

Raytheon will perform the RAM NSSMS launcher insert for the U.S., Denmark, and
any other procuring nations with the NSSMS launcher. Raytheon will possibly have
to provide offsetting work of equivalent value (circa $100,000 per launcher) to
the national orders - either internally or externally.

G. RIM-7M

The USN selected the RIM-7M to replace the RIM-7H in its upgraded NATO Seasparrow
systems for the 1980' s . As a purely U.S. effort, the AIM-7M/RIM-7M has been
under full scale development by Raytheon following a competitive fly-off between
Raytheon and General Dynamics in 1978. Raytheon is producing both the guidance
system and warhead, with General Dynamics acting as second source.

The RIM-7M, with its mono-pulse seeker, has greatly improved look-down capabili-
ties through clutter against sea-skimming anti-ship missiles and is almost

impervious to counter-measures. The R1M-7M will increase the range of the NSSMS
109

by around 50% . Testing of the AIM-7M has been very successful.

The main change in the NSSMS system that adaptation to the RIM-7M will entail is
a change in the launcher rail.

Chapter 10
F-60

7 . Product Development:

The Seasparrow Lightweight Missile System (SIMS) and Landsparrow

A fourth related follow-on development is the Seasparrow Lightweight Missile
System (SLMS) , a system that has recently evolved from the NSSMS along lines of
import for future joint US-European development projects. Raytheon signed an
inter-firm MOU in June, 1977, with most of its previous European NSSMS industrial
partners (i.e., no government participants) to develop and produce the SLMS. In

addition to Raytheon, this includes a grouping of Belgian, Danish, Dutch and

111

Norwegian firms.

A minor modification of the Seasparrow system has also led to the offering of an
air base defense variant of the system, the Landsparrow.

A. The System

SLMS builds upon the technological advances which have occurred since the
development of NSSMS, to achieve dramatic improvements and significant cost
reductions. SLMS furthermore takes advantage of the evolution of the Sparrow
missile family, from the presently used RIM-7H to the RIM-7M.

As part of the multinational effort, Raytheon is adapting the RIM-7M missile for
vertical launch by the SLMS.

The Raytheon led consortium has taken advantage of advances in technology to
incorporate into the SLMS improvements in performance , reliability, and ECCM
capability, while dramatically reducing weight (by 29 X), deck area (by 42%), and

Chapter 10
F- 61

Missile Sssiss

•’ j.V -'■Vv-\ V-.v-- ■ ‘.-f-r. ^.-s ’ - • r J+' +

— ~~—

power requirements over those of the the NSSMS. These reductions in weight, size
and power requirements make the system suitable for smaller ships (150 tons and
up) .

As a system incorporating the vertical launch concept, SLMS offers several other
advantages. With vertical launch systems (VLS) the cannister functions both as a
shipping container and launch’ tube. This allows for a greater number of missiles
on ships and a faster launch sequence than is possible in the conventional rail-
launch arrangement. The systems also help reduce reliability and maintainabi-
lity problems because the missiles are sealed in canni sters at shore-based
loading stations. Moreover, a VLS permits greater flexibility in locating the
launchers. No matter where it is placed on the ship, it provides a 360 degree
free fire zone.

B. The Team

The costs of SLMS development is figured at around $15 million. Raytheon is
funding $10 million and six of its seven European industrial partners, collec-
tively, the remaining $5 million. Besides Raytheon, the consortium includes MBLE
(Belgium); Nea-Li ndberg and Dansk Industri Syndi cat A/S (Denmark); Fokker BV and
Bronswerk-Amersfoort (Netherlands); and Kongsberg Vapenfabrikk (Norway). About
$10 million is for research and $5 million is going into Seasparrow subsystem
development divided roughly as follows:

the development of the AIM/RIM-7M missile is outside of the multinational

SLMS project, being a USN-Raytheon project;

Chapter 10
F- 62

while the multinational SLMS development effort is divided so that:

Raytheon is developing the jet vane control (JVC) and most of the fire
control system (PCS), and;

the participating European firms are developing the balance of the FCS,
and all of the vertical launch system.

A conspicuous difference between the NSSMS industrial consortium and its follow-
on SLMS consortium is that the sole Italian participant, Selenia, is missing.
Selenia was simply not interested in participating. As of the fall of 1979 there
had also been some interest from industry in both the FRG and Canada vis-a-vis
some sort of participation in SLMS. However, since neither of the industries
were involved in the original NSSMS team - except for Raytheon Canada's manufac-
ture of certain elements - corporate ties are not as well established. All of
the remaining participants of the NSSMS industrial team are also risk sharing
participants in SLMS, except that one of the three Danish participants, Terma, is
only contributing an existing system.

Chapter 10
F- 63

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Since fitting the SLMS and RIM-7M missile does not in itself provide for a full
anti-missile capability, Raytheon began company- funded development of a 2-D
radar in 1976. The radar was successfully demonstrated for the first time in
September, 1977, aboard the Norwegian destroyer KNM Narvik during a NATO exer-
cise. While continuing with this radar, Raytheon is developing a more sophisti-
cated Multi-Beam Acquisition Radar, (M-BAR) to provide 3-D capability (elevation
as well as bearing, range, and range rate).

Discussions have been in process with German industry for participation on the M-
BAR radar, but with no success to date.

Raytheon has already made presentations on SLMS with M-BAR to the U.S. Navy, the

Royal Danish Navy, and the Royal Netherlands Navy. A presentation was also made

in Brussels in September, 1979, at the NATO Naval Armaments Group's (NNAG)

112

Information Exchange Group No. 1 (IEG/1) on Above-Surface Warfare.

113

C . Project Management and Financing

Raytheon serves as SLMS project manager during the current I R &D phase and will
assume the role of prime contractor if, and when, a development and/or production
contract is ever received for the system. In the interim each signatory company
agreed to bear the full cost of development for its assigned tasks, as well as
its marketing effort, and therefore each accepted the res pons i bil i ty for the risk
of loss of its investment.

As project manager Raytheon is to:

Chapter 10
F- 65

manage the project through both development and production phases, with the
advice and counsel of the participating companies (PC's);
exclusively devise and prescribe statements of work and establish perform-
ance specifications for the PC's for each of their allotted development
tasks , and;

for a period of at least five years following initiation of the production
phase, assume the sole direction of the marketing of SIMS. Each of the PC'
will however, use its best effort to assist the project manager in marketi n
activities with their respective countries. All liaison with any customer
government before and after any contract award is to be by, or at least
through, and with the approval of, the project manager.

Upon receipt of an eventual contract by Raytheon, the system will be co-produced
by Raytheon and the PC's, which will be operating under subcontract to Raytheon.
Each firm will produce that part of the system for which it incurred the develop
ment expense, regardless of national orders. Being a purely industrial venture ,
production allocation is not a function of whether, or to what extent, a given
national industry's government orders the system - i.e., the concept of 'juste
retour' is irrelevant for this project.

Any redistri buti on of work within the consortium will involve the granting of a
use, make, and sell license by the developing firm which will be compensated by
'reasonable royalty.' Situations dealt with specifically in the MOU , that would
lead to such a diversion of work are:

if the customer government's regulations prohibits procurement from the PC;

Chapter 10
F- 66

SYSTEM

IASMOW
lEHTIQAL LAi
1YSTEM

lore ready missiles...up to 16
Tissiles per launcher system...
o bl'" ' tones.. .hemispheric
over

3es not require centerline
ck space...can be installed
i deck, in deck, or bulkhead
ounted.

o moving pa?ts...no power
rives, braking devices, or
■rvos.

if the customer government refuses to approve procurement from the PC;
if the project manager determines that the project is being jeopardized, or;
if any of the PC's decides to discontinue its participation.

This uncluttered business arrangement is the ultimate in simplicity, and in the
case of this project will probably prove. to be acceptable to future customers.
This formula is also applicable to a wide variety of projects of similar scale.
However, the acceptability of such an arrangement to national industries and
governments, once they move past a certain threshold in the resources required,
can be questioned. When a venture requires assumption of risk/investment at a
level that is unacceptable to private capital, governments are bound to enter the
picture along with the concommi ttant political considerations.

D. The Joint Test Program

The development and testing of the component systems of the SLMS have moved
forward separately. Being built up from the NSSMS , permits modular expansion to
a SLMS. The vertical launch system (VLS) is being pushed first, since it is
simpler to install on the existing NATO Seasparrow systems. The lightweight fire
control system will be introduced later. As previously stated, the AIM/RIM-7M is
under going its own separate USAF/USN test program.

The first launch test of the VLS system was in September 1980, at USN's China
Lake test facility in California. The test was successful with the exception of
some minor exhaust problems. On November 18, some two months later, came the
first guided launch test, again at China Lake. This test was also a successful
one .

Chapter 10
F-67

The next stage in the testing of the VLS took place in February, 1981, in Puerto
Rico, at the Roosevelt Roads, Atlantic Fleet Weapons Range. The sea demonstra-
tion at Roosevelt Roads was jointly sponsored by three NATO navies, those of
Canada, the Netherlands and the U.S. The USN provided the firing range and a
number of early model RIM-7M missiles. The Dutch government contributed about
^million guilders*^ and Canada contributed the launch platform, the
destroyer. escort HMCS Huron, which was outfitted in Halifax prior to sailing
to Puerto Rico. The Raytheon 1 ed- team for its part, provided the system, the
people and know-how.

The sea demonstrations of the VLS were completed with two successful firings
out of two.

Each vertically launched Sparrow missile was equipped with the Raytheon-deve-
loped Jet Vane Control (JVC) and as each lifted off, the JVC maneuvered it so
that the seeker could acquire the target drone, which was being tracked and
illuminated by the ship's fire control radar. Acquisition by the seeker was
accomplished in the prescribed time. Guidance was automatically transferred

from the JVC to the missile's autopilot, the JVC was cleanly jettisoned, and

115

the missile proceeded to target intercept.

E . Canadian Interest in SLMS

The Canadian government's participation in the Roosevelt Roads demonstration
stemmed from its interest in the SLMS for two up-coming programs: the refur-
bishing of the Huron class of destroyer escorts and, the new six-ship Patrol
Frigate Program. Both programs are expected to go-forward sometime during 1982-

Chapter 10
F-68

1983 time-frame. The go-ahead on both programs has slipped repeatedly over the
last several years.

The refurbishing of the Huron class DE's involves the replacement of older pre-
Seasparrow systems.

The Frigate Program is a major new re-equipment effort almost the size of the
CF-18 New Fighter Aircraft program. For awhile it was an either-or choice
between the two, but this is no longer the case. The industrial participation
portion of the Canadian Frigate will be less structured than that of the New
Fighter Aircraft program (see Chapter 11).

F. Landsparrow

As opposed to the major step-by-step up-grading of the NSSMS represented by the
SLMS a minor modification of the NATO Seasparrow system has led to a Landsparrow
configuration. Whereas the French Crotale evolved from a land to a sea based
surface-to-air system, the Sparrow family has evolved from an aircraft launched
anti-aircraft system to a ship-based point-defense SAM system, and now finally to
land-based point-defense SAM system. The latter step in this evolution has
involved only minor modifications, in comparison to the first step.

Since a CVN is basically just a floating air base the same concept naturally
applies for land based airfields. The NSSMS team is not really introducing a new
system. In fact two participating nations, Denmark and Norway already have land-
based sites in their inventories for training purposes. What changes are
required for adjustment from a ship to a land-based mode are actually, for the

Chapter 10
F- 69

most part, derived from a lessening of the constraints under which the system
must operate. For example, instead of a liquid-cooler operating on sea-water,
for Landsparrow a standard air conditioning system will do. In addition,
exhaust fumes are no longer a problem. Another major difference, but one that
does involve an up-grading of the basic NSSMS is that the ship-based systems
can rely on a ships own larger targeting system for passing on data. For the
stand-alone ground base system this required the addition of a radar to the
standard director system.

For base-defense, the Landsparrow fills a gap between the Roland and the
Improved Hawk SAM systems. In range Landsparrow falls roughly half way
between the two. A case can be made that base defense calls for a system in
this range, since it is not a smaller mobile system for field operations as
the Roland, or an area defense system as with the Improved Hawk and Nike
networks (and their collective successor, the Patriot).

If one looks at the mission, with regard to the four northern European
participants of the NSSMS program in particular (and the only European
customers whose industries are still participating) the largest single defense
related expense in the late 7 0 ' s and early 80's has been the re-equipping of
their Air Forces with the F- 16 fighter. As such there is some logic to making
air-base defense the no. 2 priority. Norway has been particularly interested
in filling this requirement, though it had already signed an MOU with the U.S.
government for the purchase of the U.S. Roland. Norwegian interest in the
Landsparrow as an alternative to Roland has been closely inter-related with

Chapter 10
F-70

the ups and downs of the funding battle at the center of which the U.S. Roland
program has found itself.

The principal sales prospect to date for the Landsparrow system has come from
the other end of Europe, the Greek Air Force. The Greeks had a requirement
for 12 such systems to provide air defense for 4 air bases. Those systems
competing for the contract were, in addition to the Landsparrow (Sparrow Air
Base Defense System) were Roland (Euromissile), Rapier, Crotale, and
Skyguard/Sparrow.

When the Raytheon led team bid the Greek contract in the Spring of 1979, they
offered a Landsparrow, or Sparrow Air Base Defense System, based on the NSSMS
with an option for one that would incorporate the vertical launch system. The
Greeks were originally interested only in the trainable launch version of the
Landsparrow, but later at the time of the request for the best and final offer
in March 1981, and after the successful test firings at China Lake and
Roosevelt Roads, they switched to the VLS. Since this newly developed part of
the Landsparrow is of European origin, a major part of the final proposal
effort fell to the Europeans (earlier quotes having involved simply informal
planning numbers based on the trainable launch system followed by several
short proposal extensions with 1 or 2% adjustments). This also required the
European subcontractor to drastically modify their part of the proposal
involving offsets. As the requirement gradually firmed up, the Greeks changed
a few other things, such as mobility requi rements .

Chapter 10
F-71

Not only did Raytheon rely on the assistance of its European subcontractors in
the overall marketing effort, but they had an important role to play in the
offset part of proposal effort. (Unlike Raytheon though, the European firms also
received the support of their respective governments.) The original offset
package offered by the Raytheon led team was for work in the amount of 10% of the
value of the contract. The work was to be in the form of an immediate direct
offset (i.e. involving work on the Landsparrow system itself). The offset
package eventually agreed to, however, was for 30% of the value of the contract
and would involve both direct and an assortment of indirect offsets over an eight
year period (e.g. maintenance contracts or agricultural products ordered by the
selling industrial team and their governments).

As such decisions are wont to do, the selection of the winning contractor for the
Greek air-base defense job slid several times. Political complications faced by
the Greek government which held things up included: re-integration into the NATO
command structure; U.S. base negotiations; an unexpectedly high CPI impact
during phase-in to the European Economic Community; and recovery from a catastro-
phic earthquake. In the final stages of the competition the Landsparrow was the
favored system and the Greek government was hoping to capitalize on the offset in
obtaining a political concensus in support of the procurement. By late April,
however, with unfavorable shifts in exchange rates as well as the rise in U.S.
interest rates, the bottom fell out of Landsparrow1 s prospects. The contract
went instead to the Swiss-Ital ian firm Contraves teamed with, interestingly
enough, another division of Raytheon, the Missile System Division (Lowell,

Mass.) . The system was the Skyguard/Sparrow, for which Raytheon provided the
missile, the launcher, and illuminator.

8. Transnational Ventures and Standardization at the Subsystem Level:

Parallel Developments in the Automobile Industry

At this point it would be useful to step aside and take a look at another aspect
of the problem, and how NSSMS fits into it. The NSSMS is significant to the
development of . transnational ventures in the defense and aerospace industries in
yet another way.

An additional factor contributing to the Seasparrow's success in circumventing
the numerous obstacles and booby traps lying in wait for such ventures, was that
the system in one sense is only one system or (subsystem) of the multi-system
complex represented by a destroyer, frigate or aircraft carrier. As covered in
the introduction to Chapter 6 covering license production in Europe by a single
national industry (Mode #1), the technology of the design and building of ships,
unlike with most modern aerospace products, has allowed the smaller European
nations to maintain their shipbuilding industries in tact. Both the differing
economies of scale reinforced by the political strength of any such mature
industry, have contributed to their continuing viability.

Producing ships of their own design however, is quite a different matter than
coming up with the highly complex component systems. Here the opportunity for
the smaller NATO allies to participate in the design and development of systems
for which they have no feasible purely national alternative becomes attractive.

The U.S. Navy and Raytheon were able to successfully exploit this opportunity and
eventually bring on board the majority of NATO navies.

Chapter 10
F-73

Standardization at the subsystem level was to later offer a way out of the
political embarrassment represented by the abortative attempt of the U.S. DoD to
standardize on the next generation of main battle tanks with that of NATO's next
largest tank force, the FRG. Following the bogus competition in which the U.S.
Army (not too surprisingly) expressed its reference for its own creation, the
USA/Chrysler XM-1 tank, over that of the Bundeswehr/Krauss-Maffei Leopard 2,^
the U.S. proposed to salvage the effort by the less ambitious approach of
standardization at the level of critical subsystems. This effort eventually led
to the adoption by the U.S. A. of the Leopard 2's 120 mm Rheinmetal 1 tank gun.

Much as several initiatives at the NATO organizational level during the 1950' s
(see Chapter 5) were all heralded as new developments of great potent for the
future, so was the transnational Fokker-VFW merger of 1968. The ill-fated merger
was viewed as a the logical follow-on to the recent spate of intra-national
mergers in response to the multi-national challenge. Here too, though, something
less glamorous and more workable would be required.

Similar initiatives and speculative waves concerning international economic
integration have hit other industries, the automobile industry in particular.

One such possibility that was popular back in the early 1970's was that of Fiat
and Citroen, touted as a forerunner of a series of such mergers that offered the
only feasible way for European car companies to attain the size necessary to
survive in world-wide competition with GM, Ford, and the Japanese. Though at the
time Renault was cited as an example of a firm that would be precluded from
participating in this evolution because of its being state-owned, Renault

Chapter 10
F-74

suffered no illusions or complexes on this score. Renault chose to follow a

different course.

In common with the merger option, Renault's objective was to improve the
economies of scale. Their approach however, was to attain this objective through
joint ventures that contribute to either standardization at the component level ,
combining mutually supportive product lines to rationalize distribution and
service networks , or license production arrangements. As of the spring of 1981
this involved among other partnershi ps :

A joint venture with Ransburg (U.S.) (Cybotech) for robots that spray paint
cars ;

46% ownership of American Motors (AMC) which will distribute Renault cars
and produce Renault cars under license;

Ownership of 10% of Mack Truck whi ch will distribute Renault's medium-size
diesel -engined Midliner trucks, thus filling a gap in the Mack product line-
A joint venture with Peugeot for producing automobile engines for the two
French firms plus Volvo;

A joint venture with Bendix (U.S.) - one which will produce electronic
systems in France for cars.

Quoting from Robert Ball's article in the May 4, 1981 issue of Fortune :

The purpose in every case is to gain economies of scale. Renault
executives are fond of saying, "There is no world car, there are
only world components." What they mean is that national tastes
and driving habits demand the adaptation of models to individual
markets, but that all those models can contain common elements-
engines, transmissions, and axles, of course, but also electronic
systems and even door handles.

Chapter 10
F-75

The underlying truths contained in the above paragraph are applicable the NATO
aerospace industries, as well. The differing operational requirements of the
national services, be they geographical in origin, or a matter of varying
tactical doctrines and national funding 'capacities', are all the military
equivalents of 'tastes' for such consumer products as automobiles. Which is
to say, standardization can be most easily attained within an ad hoc grouping
of like minded nations at the subsystem level.

Like Renault with its network of partnerships in the auto industry, Raytheon
has taken a lead in tackling NATO's increasingly complex industrial marketing
environment. In addition to the NATO Seasparrow and SLMS projects, other
interallied projects in which Raytheon, has, or is currently participating
included: NATO Hawk, HELIP (European Improved Hawk), AIM-9L Sidewinder,

Patriot, and Skyguard/Sparrow , to name but a few. The Seasparrow system alone
is at the center of a mix of projects involving: interoperabil ity (the Italian
Aspide and Ameri can-German-Danish RAM); interchangeabil ity (between the
Raytheon and Hollandse Signal Apparaten fire control systems); and
standardization (within the follow-on joint development Seasparrow Lightweight
Missile System and possibly the Landsparrow variant). Thus we see the NATO
Seasparrow team has successfully carved out a niche for itself in the highly
segmented market place represented by NATO's component national government's,
while simultaneously contributing to improved economies in the common and
individual defense efforts.

The Renault and Raytheon strategies are both aiming at rationalization on an

119

international level, but one short of integration. This entails partnerships

Chapter 10
F-76

on a venture by venture basis, but ventures focused on standardization at the
subsystem as well as system level, further complimented by interchangeabi 1 i ty
and interoperability.

Chapter 10
F- 77

9. Conclusion

The NATO Sea Sparrow Surface Missile System (NSSMS) is the product of the
combined engineering and development know-how of several NATO nations that,
through working in concert, were able to bring the system from a design concept
to a tested and proven reality. From among the wreckage of the various trans-
atlantic codevelopment programs, the NSSMS stands out as a shining example of
success, the only one of its kind.

Such a relationship as that established between Raytheon and its European part-
ners during the NSSMS project is of long term significance. The trust built
up and know-how accumulated since engineering development was launched in 1969
is an intangible benefit of much value. The SLMS joint development project is
a more recent manifestation of this established relationship and should serve
as the forerunner of many a future transatlantic project.

The NSSMS project represents a significant step in the direction of improved
NATO RSI, with R&D , operational and logistical advantages emanating from its
being a commonly held system, as well as the industrial, technological,
employment, and BOP advantages of jointly developed and/or produced system for
all members except the latest customers, the FRG and Greece. The program also
demonstrates the effectiveness of the post-1966 NATO cooperative R&D, and
production procedures. All of these in turn contribute to that very important
intangible. Alliance solidarity. Yet, still more important than all of the
above, remains the simple fact that this is the only major transatlantic
program involving the joint industrial development of a weapon system under

contract to a consortium of buying governments including the U.S., that has

Chapter 10

succeeded . No small feat. So, what then are the factors that contributed to
the program's success?

Chapter 10
F-79

10. Lessons Learned

The impetus for the program came from a commitment on the part of the U.S.
to provide tangible support for the new set of NATO procedures for coopera-
tive R&D and production. Thus, the U.S.N. went through NATO from the
beginning and was willing to add that important ingredient (be it no
panacea) -'political will.'

These new procedures in turn, proved to be a practical instrumental ity for

furthering these aims, as exemplified by the success of this first of the

cooperative development and production programs to originate from within

them. Though the comparison is not completely fair since this involved a

much less expensive system, this success can be contrasted with the fate

120

of NBMR 3 and NBMR 4 early in the 1 960 ' s under the older procedures.

Early identification of the system configuration, and as such,

approximate cost and schedule. In contrast to the Mallard, MBT-70, and
121

AVS , the participating nations knew at the outset what they would be
getting, and when they'd be getting it. The U.S. Navy offered the
Sparrow III air-to-air missile to the NNAG as a starting point for the
program, providing the basis for concentration on a specific
configuration. The participating nations were able to reach agreement on
a particular configuration based on prior U.S.N. studies.

The early selection of Raytheon as prime contractor further assisted the
governments in the configuration selection process. Raytheon was the

Chapter 10
F-80

122

logical choice since the Sparrow III was a Raytheon designed missile,
and also because of their previous experience of working with European
industry for the multinational licensed production of an earlier SAM
system, the U.S. Army/Raytheon Hawk.

(5) There was early agreement as to cost sharing and allocaton of work among
the participating countries. This encouraged them to proceed with
detailed planning and early commitments to the program. When a country
was unable to make commitment, it participated as an observer - only
those nations having made financial commitments participated in decision
making. This also discouraged countries from delaying their procurements
to avoid paying their share of the development cost (e.g., the
Netherlands and Belgium came in late and so were excluded industrially
from into the development phase but still paid their share of development
costs for participation in the joint production phase).

(6) In the management of the program there was a clean chain of command, from
the Steering Committee to a single program manager and project office, to
a single firm acting as prime contractor with maximum authority and
responsibility vis-a-vis the multinational industrial consortium. A
point to be contrasted with the MBT-70 and Mallard experiences.

(7) A general consequence of the above factors was that there was a minimum
of change throughout the project.

Chapter 10
F- 81

(8) The incorporation of European industry into the engineering development
phase as well as the initial sole source production phase several years

(9) The continuity of the U.S. Government personnel involved in the program

excellent, involving no significant cost increase. Closely interrelated

scale and complexity of the F- 16 effort). The numerous 'lessons learned'
contributed by the project in the area of transnational subcontract
management are treated in the 20 pages of section 4 of this sub-chapter.

(11) The plus or minus 25% zero Balance of Payments (BOP) rule provided consider-
able flexibility in maintaining a rational distribution of work, while
still allowing for minimal BOP disruption.

(12)

industries were a good match for the work packages received.

( 13 ) The predominant weight of the U.S. financial/order share in the program
(e.g.» originally 83.6% of R&D funding) has allowed for proportionate Euro-
pean industrial participation while the major part of development and pro-
duction could still take place in the U.S.

(14) Closely intertwined with (13) above is the sub-grouping of NATO member
states that are both capable of, and willing to, participate as minor
partners with the U.S. in joint projects, the four smaller northern European
members, plus Italy. This is much less feasible for the alliance's three
medium powers, France, the FRG, and the U.K.

(15) This was not a primary high prestige weapon system on the order of a fighter
plane (AVS or AFVG) or a tank (MBT-70), where it becomes much more difficult
to reconcile the views and interests of the various armed forces vis-a-vis
the nature of the requirement, as well as the much larger industrial and
financial stakes involved, i.e. something on the order of a successful
ecumenical movement was not required.

(16) This program provides an ideal model for future transatlantic joint devel-
opment programs within the framework on the "Family of Weapons" concept
where a single nation takes primary responsi bil ity for developing a system
while sub-contracting out 20 or so percent of the work to foreign industry.

A workable compromise that neatly circumvents the old impasse over

differing U.S. and European philosophies with regards to cooperative
123

development.

(17) There was no competing alternative system available that could at least
partially fill the participating nations' military requi rements . This
can be contrasted with the MBT-70 where the FRG had the Leopard I to
cover its needs adequately enough through the 70's, or with the PHM
project where the FRG had the purely domestic alternative of a
conventional patrol ship, oreven in the case of the Anglo-French variable
geometry (AFVG) fighter where France had a solely domestic back-up system
in the Mirage G.

(18) No disruption was introduced through substantial differences in
replacement schedules among major participants; differences that have to
be reconciled if a steady support base is to be maintained. For NSSMS
this was a non-issue primarily due to the predominance of one nation's
share of the orders .

(19) The fact that the system was one of a family of 3 point defense surface
missile systems being worked by the USN, helped to make the program's
vul nerabil i ty (i.e. due to its dependence on foreign participants) more
acceptable to the USN.

(20) The NSSMS was only one of a number of subsystems (be it a key one) for the
multi-system complex represented by a ship. Each of the ships were them-

Chapter 10
F-84

selves of national design. The practicality of this is somewhat peculiar to
navies, due to the nature of ship building, but does apply to a lesser
extent to the other services as well.

(21) The follow-on SLMS project provides an important model for future joint

development projects of a similar scale. Building on. the working relation-
ship established during the NSSMS project, this international industrial
team is developing the new system without government participation. This
time around the firms are risking their own capital , and as such work
sharing is not a function of government funding, or future orders.

Chapter 10
F-85

^■John Marriott, "Defense Against Air Attack at Sea," Military Technology, p.
76.

Britian and France have a different concept of point defense. They consider
that point defense missiles do not need a long range and are thereby able to
keep the missile small, which in turn reduces the size of the launcher and
makes the system somewhat more flexible. The U.S. on the other hand relies on
its Tartar and Sea Sparrow systems with ranges of 15-25 km. (Marriott,
op.cit., pg. 75).

Interestingly enough, it was the license production of another Raytheon
surface-to-air missile (SAM) system in Europe during the first half of the
sixties which made development of the competing Naval Crotale possible, the
U.S. Army/Raytheon Hawk medium altitude SAM. It was Thomson-CSF alone, among
the five National Prime Contractors of the NATO Hawk program, that fully
digested the know-how transferred during the project, and thereby could build
up from this base in the development of its own low altitude SAM system (an
example of the long term effects of the dissemmenation of technology). See
Chapter 7 for the NATO Hawk project history.

Tom E. Moore, Launcher System Manager and Project Historian, "The NATO Sea
Sparrow Surface Missile System," International Defense Review, 1/1974, p. 52.

5Ibid. , p. 53.

8See Appendix X, C-M(66)33, pp. 3-5, and Chapter 5, for a discussion of the
shortcomings of the NBMR procedures. NBMR 39 is treated in Chapter 8.

7Melvin T. Baas, United States Involvement in Codevelopment: An analysis of
the US/FRG V/STOL Fighter Aircraft and NATO Sea Sparrow Project, a thesis
presented to the Air Force Institute of Technology 1, August, 1971, p. 41.

8Ibid. P. 42.

For the document, AC/259-D/513, covering "Policy Guidance, Organization and
Method of Work for the NNAG" , see Appendix XI.

^°Baas, op. cit. , p. 36.

11Ibid. , p. 37.

12Ibid.

Charles D. Allen, Capt. USN , First NATO Seasparrow Project Manager, "NATO
Sea Sparrow," U.S. Naval Institute Proceedinqs, July, 1969, p. 145.

The selection of Washington, D.C. was a function of the prime contractor
having been American which is, in turn, a function of the systems origin and
the U.S.N. being the primary customer.

Thomas E. Peterson, Raytheon's NSSMS assistant Project Manager for Interna-
tional Operations, interview with the author, January, 1978.

^It is the Danish representative that wins the prize for longevity, having
sat on the Steering Committee continuously from 1968 to 1981.

^Moore, op. cit., p. 54.

Peterson, op. cit.

FOXC/Disk 443/Ch 10/F86-F92

Chapter 10
F-86

Quoting from a letter to the author from: Thomas E. Peterson, Assistant
Program Manager - NSSMS, International Operations, Raytheon. Naturally this
difference is in good part a function of the scale of the two projects.

Moore, op. cit. , p. 53.

Allen, op. cit., p. 147.

Norway originally planned to procure 16 systems, but later reduced this to
6, thus paying a proportionately larger share of R&D costs than would have
otherwise been the case. The U.S., as well, was to drastically reduce its
planned procurement, with similar consequences.

Moore, op. cit., p. 54.

The list of 14--Raytheon, Frequency Engineering Laboratories, Bendix, Chrys-
ler, G.E., Goodyear Aerospace, Hughes, Lockheed, LTV Aerospace, North American
Rockwell, RCA, Singer-General Precision, Sperry Gyroscope, and Texas Instru-
ments. (Note that since all competing contractors were from one nation, the
U.S., all participants were politically indifferent to the ultimate choice.)

Moore, op. cit., p. 54.

26Ibid.

Baas, op. cit., p. 38.

Allen, op. cit., p. 146.

Though the figure $40 million has also been mentioned.

The incentive guarding against an overly low original estimate was,
naturally enough, the industrial share that goes along with the funding share.

All customers outside of the original four countries that launched the
program have opted to procure a Dutch fire control system instead of the
Raytheon system and thereby procured only the NSSMS transmitter plus an NSSMS
launcher. In addition, several customers eventually procurred the Italian
Aspide missile for use with the system.

Allen, op. cit., p. 146.

33Ibid. , p. 147.

The one exception was the Low Light Level Television System, designed and
produced by associate contractor Ball Brothers Research, Boulder, Colorado.

(Interview with Steve Rowen, Raytheon's Corporate Director of Contracts,

January 1978.

Ifi

Moore, op. cit., p. 51.

K.V. and the Norwegian Defense Research Establishment had developed during
the 60' s the Penguin MK-1 surface to surface missile, one of the first
representatives of a new generation in naval armament. The Penguin's warhead
was the same as that of Bullpup for which KV had been prime contractor for the
NATO-European production consortium. The missile has a range of about 20 km,
and received U.S. government (MWDP) and FRG financial assistance, along with
technical assistance from the U.S. Navy.

Baas, op. cit., p. 43.

Peterson, op. cit.

Chapter 10
F 87

FOXC/Disk 443/Ch 10/F86-F92

40Moore, op. cit. , p. 51.

41 Ibid .

4*To place this production activity in perspective, it is useful to keep in
mind the corresponding time scale of the largest transatlantic joint
production program of the 70' s, the F- 16 multinational fighter. Several
points of comparison between the two include:

the NSSMS included the same grouping of national industries as the
F-16, except that, up to early 1979, the NSSMS also included one
Italian firm.

the much larger scale and higher visibility of the F-16 program;

the F-16 joint production effort was two and a half to three years
behind that of the Sea Sparrow;

the F-16 joint production effort was not preceded by joint
industrial development;

During 1975 when the F-16 program people from the U.S. government were
finalizing the MOU and U.S. industry was initiating the source selection
process on the other side of the Atlantic, this relevant precursor, the NSSMS,
was initially overlooked. This was a result of the smaller scale and lower
visibility of the NATO Seasparrow program, plus the fact that it involved
another service. It was not until the U.S. teams got over to Europe and began
working the details of implementation on site, that they were introduced to
the NATO Seasparrow program. The latter program was constantly cited in
referring to relevant precedents for the F-16 effort. Upon return to the
U.S. , the ASD at Wright-Patterson and several of the U.S. firms began to
actively tap the NATO Seasparrow program's accumulation of know-how. Two
firms in particular proceeded to pick Raytheon's brains in early 1976; Pratt &
Whitney and Delco.

At Raytheon's European sub-contractors the two programs crossed paths as those
seven among the eight that were located in the F-16 participating nations
began to be severely exercised, being inundated with U.S. industry survey and
negotiating teams. The experience that had been gained by these seven common
European subcontractors during the early years of the NATO Seasparrow program
was later to make life easier for the F-16 program.

Later acquired by Dannebrog, which then sold it to B&W Elektronik.

Value of subcontracts granted for Lots I and II (the initial production
effort and the period during which offset was mandatory) t national orders
from Lots I and II.

Value of subcontracts granted through November, 1979 i national orders from
Lots I and II.

The Netherlands' post-Lot II purchases altered this figure considerably,
since they later increased their original order base of 6 systems ($9.6
million), by another 12 ($28.3 million). When this additional purchase is
figured into the numerator it reduces the 158% of BOP figure to 54%.

Including orders after Lots I and II does not change the other nations' BOP
percentages all that much.

This is not to ignore the existence of low level on-going pressure from
within Raytheon to bring work back in-house.

Chapter 10
F-88

FOXC/Disk 443/Ch 10/F86-F92

Interviews with the late Jim O'Brien, Raytheon's NSSMS subcontract manager,
February-April , 1981.

Instead of 1 fire control system (FCS), 1 launcher and 1 transmitter (radar)
as with the single systems, the dual system has a 1-1-2 combination, i.e.,
with twice as many transmitters, twice as many targets can be tracked.

Two options are offered on the FCS, either the standard Raytheon system, or
the Dutch Hollandse Signal Apparaten (HSA) WM/25 system plus an NSSMS
transmitter and guided missile launch system (GMLS).

The upcoming deliveries of the NSSMS to the USN will involve a newer sparrow
missile, the RIM-7M. This missile is covered later in the sub-chapter.

51 52

* Denmark and Norway each have a single system at a land-based site used
for training and testing.

Greece is buying a new frigate equipped with the NSSMS from the Dutch.

Peterson, letter to the author, October, 1979.

Behrman, op. cit., p. 13.

56Ibid., p. 14.

MBLE was selected because Raytheon felt its management was stronger, as well
as its several million dollar bid being some $7,000 less than that of ACEC's.
This proved to be an especially fortunate choice, since three months later
ACEC was hit by a strike that lasted some 18 months.

^O'Brien, op. cit.

Peterson, interview with the author, January 1978.

^Source control drawing (SCD).

^This is not to ignore the value of the technology and know-how being trans-
ferred. Even if these loadings were seriously reduced or eliminated, they
would more often than not be replaced by technical assistance fees, licensing
fees, and royalties to compensate the U.S. firm for the technology and know
how being transfered, i.e. the U.S. first tier sub would become licensor
instead.

O'Brien, op. cit.

63Ibid.

64 Ibid.

65 I bid .

66Ibid.

67 Ibid .

Peterson, interview with the author February, 1981.

69 Ibid .

70Ibid.

7^Jim O'Brien reflected however, that even though Cartwright was limited in
who he could talk to in the European firms and thereby could not have operated
at the level required to be effective in dealing with his counterparts, this
did not necessarily have had to have been the case. Once his status and

Chapter 10
F-89

FOXC/Disk 443/Ch 10/F86-F92

authority had been established, Cartwright or an equivalent, could have
possibly operated effectively at the proper level.

Peterson, op. cit., February, 1981.

73Ibid.

74Ibid.

75Ibid.

76Ibid.

77 Ibid .

780'Brien, op. cit.

Again as a function of the smaller size and less visibility of the program
site surveillance and signatory authority for DO 250' s never become an issue
for the NSSMS, unlike the F-16.

80Ibid.

Peterson, letter to the author July, 1981.

Q O

O'Brien, op. cit.

83Ibid.

High volume U.S. Mil Std parts are being increasingly stocked in Europe on a
commercial basis, due to the increasing number of joint programs.

880'Brien, op. cit.

Foreign Currency Agreement (F-16) in Support of Multinational Programs,

Project Number 79-065 (ANW), prepared by ASD/XOR Andrews Reserve Officers
(AFSC) .

87 Ibi d .

It is expected that the Advanced Medium Range Air to Air Missile (AMRAAM)
will use the prime contractor to make currency conversions and payments in a
manner similar to NSSMS.

Peterson, op. cit., February, 1981.

O'Brien, op. cit.

Peterson, op. cit., January, 1978.

O'brien, op. cit.

Peterson, op. cit., July, 1981.

O'Brien, op. cit.

Peterson, op. cit., July 1981.

96Ibid.

All non-U. S. customers currently utilize Cooperative Logistics Supply
Support Arrangements (CLSSA/FMSO I & II).

Unlike several earlier collaborative projects there has always been on ample
supply of spares, logistics planning having received timely attention. From
day one, all participants provided money for an initial two-year supply of
spares.

FOXC/Disk 443/Ch 10/F86-F92

Chapter 10
F-90

Covered in Chapters 2 and 3.

^°Harold Brown, Rationalization/Standardization within NATO, Sixth DoD Report
to the U.S. Congress, January, 1980, p. 49.

^Bruce A. Smith, "RAM to Offer Anti ship Missile Defense," Aviation Week &
Space Technology, December 11, 1978, p. 53.

102Ibid.

103 Ibid . , p. 55.

104Ibid.

105Ibid. , p. 53.

106

107

108
109

Ibid., p.
Ibid., p.
Ibid., p.
Marriott,

58.

55.

op. cit, p. 76.

°Neither of these two follow-on developments are part of the NATO program.
The governments are not direct participants. These are both i ndustry-to-
industry ventures.

*^Here we're looking at an international teaming identical to that of the
F-16 joint production project ( i . e . , the same 5 nations).

112

For an explanation of the IEG's see Chapter 5 or NATO Document AC/259-
D/513, "Policy Guidance, Organization and Method of Work for the NNAG and its
Subordinate Groups," Appendix 1, page 1.

113

Memorandum of Understanding for International Development of the Seasparrow

Lightweight Missile System (SLMS), Sections V and VI.

114

Dutch industry (collectively Fokker and Bronswerk) is the largest non-U. S.
participant, accounting for 40% of the $5 million in total European
investment.

115

"Seasparrow VLS System in Successful Sea Demonstrations," Aerospace Daily,

April 24, 1981, p. 319.

H^Contraves was able to offer 8% financing as compared to U.S. rates in
excess of twice this.

^7To be produced under license by FMC, if selected. Both projects were
national off shots of the previous joint MBT-70 project of 1963-1970 (an
earlier subchapter of this Chapter).

118

Robert Ball, "Renault Takes its Hit Show on the Road," Fortune, May 4,

1981, p. 280.

119

Unlike Renault though, Raytheon has retreated from its policy of the late
50' s/early 60' s of encouraging equity participation in firms on the other
side of the Atlantic, showing instead a marked preference for a collaborative,
project by project approach (Rowen, op. cit.).

^NBMR 3 and NBMR 4 are treated in Chapter 5.

121

All three of these transatlantic joint design/development projects are
treated earlier in this chapter.

FOXC/Disk 443/Ch 10/F86-F92

Chapter 10
F-91

122

In spite of having to resort to a competitive bidding for the engineering
development contract after the contract definition phase, which Raytheon won
anyway.

123

With the DOD'.s policy of supporting interdependent R & D, the work is uni-
laterally funded and carried out within one nation, with the end product being
available to all partners to the agreement for license production. However,
Europe's three medium powers (France, the FRG, and the UK) emphasize the vul-
nerability of such programs to unilateral cancellation as well as the loss of
the technological capabilities generated through the R&D effort. Therefore
the Europeans have preferred 'joint' development over the U.S. preference for
'interdependent' development.

FOXC/Disk 443/Ch 10/F86-F92

Chapter 10
F-92

The G.E./SNECMA CFM-56 ENGINE

The CFM-56 engine was developed jointly on a 50-50 basis by General Electric
of the U. S. and SNECMA of France for use on commercial air transports. The
CFM-56 utilizes the core components of the F101 engine developed by G.E. for
the USAF with minor change, combining it with a SNECMA designed and developed
fan and fan turbine to create the CFM-56. For France the engine represented
its first foray into the world commercial air transport jet engine market.

While still under development, interest in the engine began to shift more
towards its military applications. The engine was first included in a package
of industrial collaboration alternatives offered to a NATO consortium for its
purchase of the E-3A AWACS, a system utilizing a militarized version of the
707 for its air vehicle. It represented the major portion of the work offered
from 1975-78 to the French if they were to participate in the NATO purchase.
Though France was active in the NATO planning efforts and reportedly on the
verge of coming in several times over the three year period, when participa-
tion in the government consortium making the buy was finally firmed up in late
1978, France was out. Consequently, the NATO fleet of 18 E- 3 A 1 s is being pro-
duced with Pratt & Whitney TF33 engines, as have been those of the USAF.

Instead, in January 1980 the CFM-56 engine was finally kicked off by another
major military program, the re-engining of the USAF, and (later in the year)
French Air Force Boeing KC- 135 tankers. The USAF was planning to re-engine at
least 300 of the KC-135's and France all eleven of its C- 135 F 1 s .

Chapter 10
G-l

The CFM-56 engine project was launched in the fall of 1971, after the French
government selected General Electric over United Technology's Pratt & Whitney
as the SNECMA's partner for joint development of a new 10- ton engine (the
French government is majority shareholder of SNECMA while United Technology is
a minor shareholder). For the French government this was part of a strategy
of strengthening its national aerospace industries; SNECMA being the number
two aircraft engine producer in Europe with 6% of the free world market for
gas turbines (1977 sales) compared to 16% for Rolls Royce. G.E. also had a #2
status, with 19% of the free world market against United Technology's Pratt &
Whitney with 39%.

As the #2 U.S. and free world producer, G.E. had adopted a strategy of "share-
the-market-to-gain-total -market" to improve its market position against the
dominant commercial producer, Pratt & Whitney. G.E. pursued its own "brand"
of international sales involving various licensing and subcontracting arrange-
ments (with the latter being both integrated co-production as well as second
sourcing) an area where Pratt & Whitney had been much less active, at least
until the mid-70's .

In response to the question as to whether there was any particular reason why
this high degree of collaboration which has appeared in the aircraft engine
segment of the U.S. aerospace industry before other segments, G.E.'s Bill
Bodenbaugh offered the peculiarity of the place of the engine within the total
aircraft as the possible cause. Engine producers, as the subcontractor pro-
viding a major subsystem that is optional, are also providing one that is sig-
nificant enough to offer a tempting target for demands of offsetting industrial
parti ci pation .

Chapter 10
G-2

Within the general framework provided by the relative strength in the commer-
cial aircraft engine market of its principal competitor and the nature of
engines within the range of aerospace products 9 the international environment
also provided a number of stimuli to G.E. planning with regards to its commer-
cial engine development programs. G.E. needed a foreign industrial partner in
light of two major stimuli:

the need of such a partner for market penetration, and;

R&D costs.

G.E.'s revised CFM-56 Proposal of March, 1973, to the State Department's
office of Munitions Control (OMC), one directed at convincing the U.S.

government of the merits of the joint program, elaborated on these two points.

The increasing nationalism of most world governments and the
locking user/manufacturer/government-sponsor relationships that
exist within geopolitical areas. . .the European Economic Community
being a prime example. Also, in several instances, single, national
companies have been formed by combining several independents for
merged strength. In addition, companies within the EEC can get
together and form consortia whereas U.S. anti-trust laws prevent
such activity by U.S. firms (e.g. , imagine G.E.
and Allison getting together and forming a

Within the commercial aerospace arena (historically a very strong
positive balance of trade market) the effects of reduced U.S. Mili-
tary R&D sponsorship coupled with the rapidly rising risk capital
requirements of major new programs are hindering traditionally
strong U.S. corporations in fitting their reinvestment capability
with the market opportunity timing.

The proposal continued:

This resulting competitive environment calls for a "share-the-market-to-gain-
total -market" plan and is the strategy on which this CFM-56 engine is based.
The points noted below appeared to be most pertinent in the formulation of
this strategy.

The U.S. trade balance remains negative for foreseeable future.
Attractive U.S. exportables include high technology areas.

Overseas governments are dedicated to self-improvement in high tech
nology areas.

U.S. must find a business relationship overseas in high technology
which will assure a positive U.S. trade balance.

General Electric has shown positive results from a strategy of join
ing/sharing in high technology product areas.

The need for the revised proposal referred to above brings us to one of the
two interesting aspects of the project that will be mentioned here— the U.S.
government's concern over the technology aspects of the program. In August
1971 G.E. received a 12 month export license from the State Department's
Office of Munitions Control (OMC) which administers the International Traffic
in Arms Regulations (ITAR), allowing for the discussion of CF6-50 level compo
nent technology data for purposes of initial CFM-56 design. In May, 1972
requests were submitted by G.E. for an extension of this technical data
license, along with an application for a core hardware export license. The
OMC issued a technical data license extension, with certain limitations
attached, but the request for the hardware license was refused. This halted
further work on the precedential G.E./SNECMA effort.

G.E. set forth a solution to the impasse in its Revised CFM-56 Proposal of
March, 1973, one which it felt accommodated the central U.S. government con-
cern—the timing of the F-101 core hardware export (the F-101 being under
development for the USAF's B-l bomber) and the protection of U.S. technology
embodied therein.

Chapter 10
G-4

After explaining the rationale for its "share-to-gain" concept previously refer-
red to, the revised proposal went on to make its case with regards to the CFM-56
specifically. Within the world market for aircraft gas turbines, the commercial
market was the major growth segment, significant participation in this segment
being attractive and necessary to generate the reinvestment capital that would
be needed to keep the major suppliers strong. More specifically, the need for
the "10- ton" engine stemmed from the need:

for an increase in productivity in the short/medium range market to

handle growth in Revenue Passenger Miles;

to incorporate advances in low noise and low emissions, and;

for improvement in the relationship between operating costs (i.e.,

fuel and labor) and revenue.

G.E. pointed out that within this predicted marketplace for the new engine,

60% was likely to be sold outside the U.S.— with an even higher percentage being
sold off-shore in the early years. Pointing to the success of its previous
pursuit of a "share-to-gain" concept with regards to license production of its
military aircraft engines (the F-104's J79) overseas during the 60 ' s ; as well
as the concept's more recent expansion to such arrangements in the early 7 0 ' s
that included:

the creation of a Turbomotori a joint venture in Italy with two
Italian firms as sales and service agent for G.E. power plants, with
a charter providing authority for eventual design and construction
of power plants, and;

the CF6-50/A300 co-production arrangements.

Chapter 10
G-5

G.E. next, developed its argument in the revised 1973 proposal through estab-
lishing a definite trend towards a reduction in the lag of EEC engine technology
to that of the U.S. over time- a principal reason being that, "for a
particular engine family, the rate of improvement of fundamental technology
slows as that type of machine matures after the initial 'breakthrough.' Thus,
we find the EEC inevitably closing the gap."

G.E. concluded its case by pointing to the advantages it offered with regards
to military programs, the U.S. research and development base, and U.S. indus-
trial preparedness.

The military uses foreseen at the time included:

a favorable impact upon B-l acquisition costs, and;
offering itself, either on an off-the-shelf basis or through a deriva-
tive, for the replacement aircraft for such military transports as
the USAF's C-130's and Franco-German Atlantic, Noratlas, and Transal 1 .

As regards the U.S. research and development base and industrial preparedness,
G.E. made the following points (which were to become, when adopted several
years later by the U.S. government, an important part of the reasoning involved
in the selling of NATO RSI to opponents in industry, labor, and government).
After first pointing out that the U.S. government's sponsorship of aircraft
engine R&D (besides providing an insecure market place) was expected to settle
out at a new, lower level during the 1970' s as compared to the previous decade,
it continued:

"To remain technologically competitive, corporate reinvestments ( I R&D
sharing, margin on commercial programs, etc.) must play a more important
role in maintaining U.S. technology leadership."

Chapter 10
G-6

This joint GE/SNECMA program was represented as a positive step in that
it:

o released G.E. discretionary funds for advanced research and
development, and;

o CFM-56 production would generate over $100 million of IR&D shar-
ing funds.

And with regards to industrial preparedness :

Retention of a viable manufacturing base is critical to the U.S. engine
industry. Major U.S. participation in the growing overseas market is
best assured by the share-to-gain approach to the "10-ton" engine. The
positive trade balance that results from this concept means more U.S.
jobs are retained in our industrial base than if the EEC were to "go it
alone.

Therefore, after presenting all the business imperatives behind the project,
G.E. proposed to revise the program to protect the core technology by delivery
of a sealed core to SNECMA at a date 18 months later than originally proposed.
More specifically this would involve, among other changes, the transfer of
systems management from SNECMA to G.E. and all core manufacturing and assembly
being accomplished in the U.S. by G.E., with no internal core engineering data
being measured during testing in France.

The OMC and DoD found this second proposal to be acceptable and the hardware
export license was issued for the sealed core of the CFM-56.

The compromise referred to above is an example of the necessity, as well as
possibility, of finding a way to building a balanced arrangement that can pro-
vide maximum protection for each country and company involved in the transna-
tional enterprise. As the revised proposal accommodated the concerns of the
U.S. government in a manner acceptable to the other participants, a revenue
sharing as opposed to profit sharing, scheme was devised that dealt with a

Chapter 10
G-7

primary concern of the industrial partners. G.E. and SNECMA adopted a mechan-
ism that reduced that part of the pro j act's risk resulting from its "joint"
nature-i .e. , the vulnerabil ity of each partner to having to pay for the prob-
lems of the other. In order to avoid the resultant undermining of accounta-
bility, a system was needed that could effectively insolate each party on this
point. In dividing up the work a clear division of responsibilities was pos-
si bl e— G.E. for the core, and SNECMA for the fan and fan turbine. Cost
responsibilities could therefore be divided up and fixed within the project
and total revenue (not profit) could be shared on a fixed percentage basis.

This fixing of costs then resulting in two independent profi tabil i ty equa-
tions. Therefore, on a cross-borders basis, costs were fixed, leaving the
individual firms (or the national governmental budgets) to cover any excess
costs .

The responsibilities for the CFM-56 are divided more or less equally between

General Electric and SNECMA, with CFM International providing overall program

management: General Electric being responsible for the core engine and the

main engine control system and also for design integration; while SNECMA is

responsible for the low pressure system, the thrust reverser, gearbox, accessory

integration and engine installation.

CFM International negotiates contracts with customers and subcontracts manu-
facturing to the two parent engine companies. SNECMA and General Electric
will each build the parts which they have developed. There was no planned
duplicated manufacture, but there will be two assembly lines, i . e . , engines
for the U.S. market were being assembled by General Electric, and those for

Chapter 10
G-8

the French by SNECMA. However, because of the CFM-56's modular design con-
cept, assembly only represents about two percent of the total volume of work.

For a project management team, the joint venture has a rather small staff,

relying heavily on the two parent firms. As an example in late 1976, although

CFMI negotiated contracts with customers, there were only four marketing people

on the staff, most activities in this sector being undertaken by General

Electric and SNECMA personnel who follow instructions from and act on behalf

of CFMI . The two companies did not expect CFM International to grow a great

deal , remaining purely a project management team for this one project.

In line with the revenue sharing principle, there is no flow of money and no

comparison between the costs of production in Europe and the United States.

In effect, the total price paid for an engine is split into several different,

unequal amounts. CFM International takes a small part to cover its costs,

SNECMA and General Electric each take 50 percent of the sum allocated to recoup

development expenditure, while they also share, not equally, but on a basis of

their respective contributions, an amount allocated to cover marketing and

product support costs. Finally the production value allocation is split to

give a certain percentage to SNECMA to cover work on the low pressure components

and another percentage to General Electric to cover work on the high pressure

section, while yet a third percentage goes to whichever of the two companies

is responsible for final assembly and testing of the particular engine. There

is a profit in each of the different categories.

Chapter 10
6-9

C apables d'etre ravirailles en voi, un Mirage IV A des FAS. deux Mirage F;C

de ;a Defense aerienne et un Jaguar de ia Force aerienne ractique < Adj C Degout Sirpa Am.

In summarizing several of the more salient conclusions that could be drawn
from the accumulation of experience by G.E. in the area of licensing and tech-
nology transfer, in a January 1978 interview in Lynn, Massachusetts, Bill
Bodenbaugh of G.E.'s Aircraft Engine Group cited the following:

Ever since its first licensing agreement with Rolls Royce for the
T-58 engine, GE has found that it has received a very important
flow-back in technology from its foreign licensees.

The fear of creating future competitors through licensing the trans-
fer of technology is usually unfounded, mainly due to the foreign
licensees incapacity to fully digest the transferred technology.

This is further complicated by the need to learn the rigorous qual-
ity control which is concommitant with the transferred technology.
This seriously impacts the cost of gearing up for 100% production of
a given end item.

It is on the sale of follow-on technical assistance, not the royal-
ties on Maintenance, Overhaul and Repair (MOR) licenses, where a
licensor makes the money.

In the late 1970's, Boeing, SNECMA, and General Electric conducted successful
development and flight test programs utilizing a 707 aircraft and CFM-56
engines. CFMI and Boeing each contributed $25 million to the joint program.
Following its first flight in November 1979, the Boeing 707 CFM-56 equipped
test vehicle completed 84 flights and 164 test hours. The program reinforced
the position of the CFM-56 as a logical candidate for updating several
military and commercial aircraft.

Chapter 10
G- 10

'ans I'aile d’lin C 135 Fde la 91 Escadre de ravitaillement en vol, un Jaguar del’Escadron de chasse 417 “ Limousin La fin de la mission des deux appareils
eomnortait une approcheen formation vers leur base mere: Istres (SgcJ.P. Gauthier Sirpa Air).

• C105 F (KQ - Ravitailleur (+ transport) •
3L08.56/270L64 - £ 39,87 m L 4150 m
H 12,70 m - 136000 kg - 15000 m -
900 km/h a 10000 m * Quatre riacteurs
Pratt et Whitney V 57 P-59 W de 5 750
daN chacun - 2 500 m D/1 800 m A (2) -
Deux pilotes,.un navigateur, un operateur
ravitailleur - Capacity de 10/40 tonnes de
carburant a transferer pour un ravitaille-
ment a 2 500/4 500 km avec retour base •
Dis 1985 les C135 seront remotorisds
avec des rdacteurs franco-amdricains
CFM 56 de 10 tonnes de poussde qui amd-
lioreront notablement ses performances -
Boeing (E U.).

N° 381 - Air Actu Juin 85

As previously mentioned, the USAF selected the CFM-56 turbofan for its USAF/
Boeing KC-135A tanker aircraft on January 22, 1980 for the re-engining develop-
ment program. The competing solutions were for the JT8D-209 or the TF-33,
both proposed by Pratt & Whitney. The CFM-56 was selected because it offered
higher performance, lower life cycle cost, less noise and easier support. The
new 22,000 lb-thrust engine improves take-off performance, increases fuel pay-
load and lengthens range. The CFM-56 will almost double the tanker's refueling

capacity.

The selection of the CFM-56 was announced simultaneously with that of the award
to Boeing of a $13.6 million contract for planning, preliminary design and
developmental testing of one re-engined KC- 135 A tanker equipped with CFM-56s.
Two months later the House Armed Services Committee's subcommittee on procure-
ment recommended authorization of $60 million for procurement of production
tooling and long-lead materials to initiate the KC- 135 re-engine program.

The importance of this program is readily apparent when one considers that the

USAF operates some 615 KC-135s, the military precursor of the commercial Boeing
6

707. Another 11 C- 135s are operated by France's Armee de 1 'Air, the only
foreign customer of the system.

Although the US Air Force had yet to take any decision on the number of air-
craft to be re-engined, CFM International officials believe it is reasonable
to expect that something on the order of one half of the KC-135S, i . e . , around
300, would ultimately be converted. The aircraft will be designated KC-135RE.
With five engines per aircraft (one spare), the total order would involve the

N° 375 - Air Actu Novembre 84 19

Le premier Straroranker KC 135 “R ” a fait son roulage tout recemment. Ses quatre CF\1 56 accroitront
norablement ses performances (CF\1 International).

Le premier KC 135 R. remoronse. sera livre a I 'US Air Force en 1984 f Boeing MAC).

manufacture of some 1 ,500 engines, which— on the basis of Boeing's $10.9 million
estimate for the complete re-engining of one 707— would represent a total cost
of $3,500 million, according to Jean-Cl aude Malroux, President of CFM Interna-
tional, during a 1980 interview with Interavia.^

The USAF began to retrofit in 1982 the KC-135 ' s , concurrent with flight-test
as little risk had been anticipated. The retrofit program will serve to pro-
long the service life of the aircraft, the first of which was delivered to the
USAF as long ago as 1957.

Re-engining will complement a life extension program started in 1975, in which
the wings were reskinned. Other improvements under consideration for the
KC-135 included winglets. These wingtip airfoils should save up to 45 million
US gallons a year across the fleet by reducing aircraft drag some eight
percent. Tt would take about four years to equip the KC- 135s with winglets,
by which time, it is estimated, the retrofit would have been paid for in fuel
savings . ^

The conditions under which the KC-135RE production work would be distributed
between the two nations industries was initially up in the air. Under the
terms of the General El ectric/SNECMA agreement, the workload was to be shared
equally by the two companies, though the initial agreement between the two
manufacturers does provide for the engine to be manufactured entirely in one
of the two countries if either of the two Governments concerned specifically
requests this . ^ Although it has been expected back in 1980 that
Congressional pressure might require the entire re-engining program be carried
out in the U.S., this never occurred.

Chapter 10
G-12

MOTEUR CFM

cfm Q international s.a.

MUALC COMMUNE Si SNECMA I FRANCE j FT Dt GENERAL ELECTRIC « U.SJM

J.e Hf/iatn.

As a reflection of the larger US market for the engine, CFM moved its head
office from France to Cincinnati, Ohio in January 1980.

Commercially , the CFM-56 has also firmly established itself as an alternative
powerpl ant for Boeing 707s and Douglas DC-8s. By early 1980 the program had
come a long way since the September 1976 Interavi a article which had referred
to it as "an engine still looking for an aircraft".

At the time the US Air Force decision was announced in mid-January, seven air-
lines had chosen the CFM-56 to update some of their DC-8 fleets - a total of
87 aircraft in all, involving some 500 engines . ^

The conversion was being managed by Cammacorp, Los Angeles, Calif., which buys
the engines from CFM International and is responsible for the modification
design, certification and product support. McDonnell Douglas modifies the
aircraft under contract to Cammacorp.

Boeing and CFMI provided the basic nacelle design for mounting the CFM-56
engine. Boeing supplied the necessary nacelle engineering data for McDonnell
Douglas to design the new strut to interface with the 707/CFM-56 components
and to support FAA certification.

The number six in Series 60 DC-8s is replaced by a seven to indicate CFM-56
conversion. The DC-8-71 is expected to produce a 21-25 percent fuel saving;
on a DC-8-72 a 14-23 percent improvement is expected, and on a DC-8-73 a 14-20
percent saving. Entry into service began in late 1981. CFM also believes

Chapter 10
6-13

CFM56.DEJAUNAN!

Apres un an Sexploitation
commeroiale representant
plus de 100.000 heures de
vol, le CFM56 a vraiment
quelque chose a fete?.

Le moteur CFM56 s’est

revele superieur aux autres moteurs debutants
lances depths dix ans. Pendant sa premiere annee
d’exploitation, il n’y a eu pratiquement aucun
retard du au moteur sur L300 decollates. Les
revisions non prevues sont tombees de 33 a 15
au cours de cette annee.

C’est bien la preuve que le CFM56 se bomfle en
prenant de l’age.

Et qu’il grandit en sagesse.

Les DC-8 remotorises sont beaucoup moins bruyants
et moins gourmands, la consommation diminuant de
plus de 20%.

Le CFM56 leur a donne une nouvelle jeunesse et une
nouvelle force. Pour de nombreux pilotes, le DC-8/
CFM56 c’est du gateau.

Puissance, fiabilite, economie, le CFM56 tient
• ladragee haute atous les autres
moteurs.

Joyeux anniversaire.

cfm Q international

FiUALE COMMUNE OE SNiCMA FRANCE IT DE SENERAL ELECTRIC U.S.A.

that high take-off weight DC-8-50s have potential for re-engining. Cost of

re-engining a DC-8 is put at roughly $9 million (1978 prices).

Taking one of the seven airlines as an example, Transamerica Airlines announced

in December 1979 that it would re-engine its seven DC-8-63CF aircraft with

General El ectric/SNECMA CFM-56 turbofans at a cost of about $75 million. The

airline's president said replacing the planes’ JT3D engines with CFM56s would

increase their useful economic lives by at least 10 years. Their range with a

full payload would be increased from about 4100 to about 4650 nautical miles,

their noise levels would be reduced by about 70%, and the airline would save

about seven million gallons of fuel per year. The aircraft also would be able

to use shorter runways, significantly increasing the number of airports at

which they can operate.

CFM-56 was certificated in November, 1979 and made its first flight on a

Boeing 707 on November 27, 1979. A price of $10.9 million, including the

engines and related changes to the wing structure and hydraulic, electrical

and instrumentation systems, was being quoted for re-engining of 707-320

aircraft. About 500 of these were in service and Boeing believed the 707-700

would be attractive to carriers with long, thin routes. It could carry 160

passengers 5250 nautical miles, a 10% range increase over the JT3D powered

707, with a fuel consumption reduction of 14-18%.

CFM-56 was also being proposed at that time for Airbus Industrie's four-
engined TA11, Fokker's F.29, the McDonnell Douglas DC-9 Super 80 and a Boeing
737 derivative.

Chapter 10
G- 14

In December, 1980 came another major milestone for the new engine, but back on
the military side of the market. France agreed to share 10 percent of the
cost of the on-going USAF development engineering program to integrate the
engine with KC-135's.

Disclosure of the intended Memorandum of Understanding (MOU) came in mid-December

in a letter to Congress from Army Lt. Gen. Ernest Graves, director of the

Defense Security Assistance Agency (DSAA). The joint project was to go into

effect unless rejected by the relevant congressional committees by January 10—

which it was not.

Under the MOU, France agreed to pay $28.5 million of the common development
engineering and non-recurri ng production costs (in FY 1980 U.S. dollars),
while the U.S. paid $256.5 million. The French share was a fixed-price con-
tribution in then-year U.S. dollars not subject to adjustment for inflation,

changes in the numbers of aircraft eventually engineered, or any potential

cost growths within the scope of the agreed program.

The agreement covered all common development engineering and non-recurring
production costs for the integration of the CFM56 engine. Any development
engineering or non-recurring production costs unique to one nation's aircraft
were to be borne by that nation. Once this R&D program had been completed,.
France planned to re-engine its entire fleet of eleven C- 135 tanker aircraft.

The estimated cost for this effort was $220 million (FY '80 U.S. dollars).

Exact cost would depend upon where the French aircraft engines fell in the

production line.

FLY THE LEADER.

The world's best-seller has a
four-year head start on everybody else.

The Boeing 737-300 is now in commercial service. It’s just the start of Boeing’s commitment to give the
airline industry the right technology at the right time in the short- to medium-range market. Now that the
737-300 is off the ground, we’re already at work on new ideas that’ll put Boeing even further ahead. It will
be late in 1988 before any competitor gets off the ground with passengers on board.

Sixteen customers have ordered 163 Boeing 737-300 jetliners.

Getting people togemer.

INTERAV1A 5/1985

In 1983 the CFM-56 was selected for two newer Boeing military systems utiliz-
ing the 707/C-135 family of air vehicles:

o The USN fleet of 15 E-6 aircraft for communication with submerged ballistic
missile submarines.

o The Royal Saudi Air Force fleet of five E-3A's and eight KE-3A tankers.

Unlike the KC-135R retrofit program, the USN E-6, the Saudi E-3A and Saudi
tanker programs all incorporated the CFM-56 in-line.

Meanwhile momentum had picked up in the commercial market with approximately
100 DC- 8 1 s being retrofitted with the CFM-56 and Boeing's selection of the
engine for its advanced avionics/stretched version of the 737, the -300. Orders
for fifty 707- 300 ' s had been placed by November 1983. Derivatives of the
CFM-56 were also under consideration for the Airbus A320 and a possible -400
version of the Boeing 737.

By the end of 1983, the program had clearly become a major success story and
France had finally penetrated the air transport side of the world jet engine
market.

As of late 1983 this monument to Franco-American industrial teaming was appar-
ently on the verge of another success with the probable belated selection by
the French Air Force of the Boeing E-3A AW ACS powered by CFM-56' s to fill the
nation's still open Airborne Early Warning requirement.

Chapter 10
6-16

Chapter 11

MODE #6 BI-LATERAL OFFSETS

The bi-lateral offset Mode of industrial collaboration cropped up around 1959
on a low-level between the U.S. and two of its NATO allies, Canada and the
Federal Republic of Germany (FRG). The diffuse set of Canadian offset arrange-
ments originated within the framework of a series of unique government-to-
government agreements over the years 1941 through 1963. Following a 1958
Canadian government decision to no longer unilaterally develop major weapon
systems for its armed forces, Canada began to push more agressively for con-
tracts to offset their orders for U.S. equipment, when license production was
not feasible. This 1958 decision ultimately culminated in the U.S. -Canada
Development Sharing Program signed in 1963. The FRG, for its part, starting
1959, was required to offset the costs of stationing U.S. troops in Central
Europe through the purchase of U.S. weapon systems. The intensity of its use
increased in the 1961-2 period with the U.S. Gold flow related, weapons sales
offensive. This occurred within the context of a readjustment of transatlantic
relationships following the economic recovery of Western Europe and the drastic
phasing down of the Military Assistance Program (MAP). As the Germans had
increasing difficulty digesting the weapons being forced upon them, later in
the 60' s, more purely financial offsets had to be introduced.!

The British had similar but looser arrangements with the FRG. The third NATO
power, France, followed a different tact, however. This tact was influenced
by the lower stature of the French ai rcraft/defense industry at this time, the

Chapter 11

explicit policy of fostering Franco-German reconciliation, as well as the
reparationist overtones of the Anglo-Saxon approach. France instead utilized
its leverage to bring the Germans in as a junior, and eventually co-equal
partner, to jointly rebuild their aircraft/defense industries through a wide
range of collaborative projects. Starting with license production in the FRG
of the Noratlas transport in the mid-50's (Mode #1 of industrial collaboration,
see chapter 6), this rapidly expanded to include most of the early joint develop-
ment projects (Mode #3) such as the Transall C- 160 cargo aircraft (replacement
for the Noratlas) the Atlantic maritime patrol aircraft, and the first Franco-
German tank project (AMX-30/leopard I) in the late 50' s, the Euromissile family
of tactical missiles in the mid-60's and the Alpha Jet in 1970. All these.
Franco-German joint development projects are treated in Chapter 8. This Franco-
German teaming ultimately attained its crowning success with Airbus Industrie
in the late 1970's.

Consequently France was not to enter the picture, nor the FRG for that matter,
for Mode #6 on the selling end until fully re-established in the late 60 1 s .

Then in the 1967-70 period, the utilization of industrial offset agreements
virtually exploded. The Germans with the Leopard I tank and the French with
the Mirage III/V fighters used this technique to sustain their efforts to
reassert themselves in the face of two decades of U.S. armament domination.

The U.S. also resorted to various arrangements with the FRG and the UK in the
1967-68 time frame to assist the governments in their F-4 Phantom purchases
and several other major aircraft procurements. Since 1975 the U.S. government
and industry has entered into various bi-lateral offset arrangements for such

Chapter 11

systems as the F-5 to Switzerland, the AWACS with the FRG, CH-47 to the U.K.
and Spain, the Improved Hawk to Belgium and the Canadian purchases of the CP-
140 and CF-18.2 These sales related offset arrangements involved a mix covering
the following range of sub-categories, all of which are borne out in one or
more of the projects treated in this chapter.

(a) financial, political, or industrial;

(b) military or non-military hardware;

(d) external or internal to the system being purchased;

(e) internal or external to that quantity of the system purchased by the
customer;

(f) sole or second source subcontracting;

(g) explicit or implicitly linked (the latter often being the case of
U.S. government because of the difficulty of reconciling such neces-
sary bargaining with U.S. competitive selection policies);

(h) reciprocal direct sales (a system for a system);

Chapter 11

(i) the level of technology involved and the direction of its flow, and
whether it is being transferred as intellectual property rights (i.e.
know-how and data), or through hardware;

(j) the party providing the offset actually acquiring the goods or promot
ing their purchase by a third party.

Mode #7 is basically an expansion of this Mode of industrial collaboration
from a bi-lateral to a transatlantic multi-lateral basis. The three major
projects in this Mode, HELIP (the NATO-Europe Improved Hawk project), F- 16 the
Multinational Fighter, and NATO AWACS are all treated in the next chapter.

Chapter 11

A. OFFSETS FOR BRITAIN'S F-4 AND F-111K ORDERS, 1965-1968

When Britain's Labor party came back to power in 1964, after 13 years of Con-
servative rule, they were faced with the prospect of. having to cut-back on the
considerably over extended British budget. A series of military program can-
cellations followed during 1964 and 1965 that were expected to bring quick
disaster to the British aerospace industry. This did not happen, however.

Following this series of cancellations, the Labor Government opted for a less
ambitious, but more realistic, approach to procuring the equipment needed by
the armed forces while still sustaining its national defense industries.

In order to provide for a more rational basis for aircraft development, the
Labor government decided to implement the recommendations of the Plowden
Committee. The Plowden Committee, formed by the Labor Party after the elections
to study the aircraft industry, had recommended the setting up of joint ventures
with European partners as the only realistic route to maintain the national
aerospace industry. Consequently, instead of the prior approach of taking
advantage of its across-the-board capabilities to go it alone in the development
or at least production of virtually all its needs, the new strategy would involve
two additional supporting pillars:

(a) for use over the short term, direct purchases from the U.S. to fill
immediate needs, reciprocated by an opening up of the U.S. market,
and ;

Chapter 11

(b) what was to be a longer term solution, an alliance with France for
the development of new systems.

The latter option involved the Jaguar/AFVG fighter package, plus the Puma/Ga-
zel 1 e/Lynx helicopter package, which are treated in Chapter 13 (Mode #8), and
led several years later to a further diversification of its choice of partners
to other continental nations as well, treated in Chapter 8 (Mode #3, e.g.,

MRCA and FH-70). Here we'll treat briefly the UK-U.S. procurement arrangements ,
as it was the pillar falling within Mode #6 of industrial collaboration.

During the 1965 to 1967 time frame the United Kingdom contracted for some 170
McDonnell F-4K and F-4M Phantoms, 66 Lockheed C-130 Hercules transports, and
50 General Dynamics F-111K variable-sweepwing aircraft to fill immediate require-
ments of the British Armed Forces. Such an enormous order for foreign aircraft
was not something that the British Government could place lightly, in view of
the country's recurrent, acute balance of payments problems and the importance
of the British aerospace industry vis-a-vis employment, BOP, and technology.

The budgetary savings achieved by cancelling the previous programs - especially
the TSR-2 for which the F-111K was to be the replacement - would make little
sense if they were replaced by a large budgetary and foreign exchange cost as
well as massive industrial dislocation.

The arrangements adopted to minimize the disruptive effects of these procure-
ments included a mix of British Government provided internal offsets, and U.S.
Government provided external offsets. The internal offsets involved a modifica-

Chapter 11

The HERCULES is a rugged aircraft primarily
intended for tactical operations from short un-
prepared airstrips. If required, however, it is also
capable of mounting long-range strategic lifts.
Versatility is the keynote of the Hercules which
may be operated in the troop-carrying, para-
trooping, supply dropping or aeromedical roles.
Photo: British MOD

t i on of the 3 U.S. aircraft so as to incorporate various percentages of British
equipment. This was further complimented by a complex set of external offsets
sales agreement with the U.S. for the F-111K. These were based on the removal
of the Buy American barriers for British firms competing in the U.S. military
market for contracts totaling up to a certain fixed level, plus the inclusion
in additional 3rd country sales packages, both serving to help cover the dollar
expenditures involved in the British buys.

No formal external offset was obtained for the British purchase of the C-130
or the F-4. The 66 Lockheed C-130 Hercules ordered for the RAF Transport
Command, were purchased at almost exactly the same price as paid by the U.S.A.F.,
since only a minimal amount of British equipment was included. The reverse
was true for the 170 F~4K and F-4M's ordered by the British Government. 3

1 . The British F-4 Phantom

It was originally decided to re-engine the Phantom with the Rolls-Royce Spey
25 bypass engine when the Royal Navy asserted that the Spey would be necessary
to allow the Phantom to operate from existing carriers, mainly the Ark Royal .4
When this became an urgent operational requirement, in February, 1964, develop-
ment cost of the Naval version of the Spey, was estimated at $70 million. By
June, 1964, when it was necessary to decide definitely whether to proceed with
the project, the cost was provisionally reassessed at somewhere between $85.2
million and $109.2 million. However, the ministry had still not received a
detailed specification or a costed technical program for the Spey engine. In

Chapter 11

RAF Germany:

F~4 Phantom
Photo: Ministry
of Defence ,
United Kingdom

Source

NATO's Fifteen Nations

fact, a costed technical program was not received from Rol 1 s^Royce until shortly
after the decision had been made to purchase a version of the Phantom for the
RAF in February, 1965. This costed technical program showed that the estimated
cost of developing the Spey engine had more than doubled, and that the estimated
production cost had substantially increased as well since June, 1964.5

It had finally been determined by May, 1965, that the total cost of developing
the Spey engine, plus modifying the USN/McDonnel 1 F-4 Phantom airframe to take
the engine and British avionics, had risen to between $224 million and $252
million for both versions. Shortly, thereafter, the Royal Navy and the RAF
reviewed the program and, in light of the unexpectedly high development costs,
told the government that they would be prepared to accept the Phantom with an
improved version of the General Electric J79, one which would allow operations
from the Ark Royal. In spite of this, the decision was ultimately made to
stay with the Spey.

In January 1968, with the announcement of the F-111K cancellation and other
program cut backs in line with the British decision to abdicate its role as a
world power and phase its defense commitments into a regional , NATO centered
one, it was also announced that the order for 170 Phantoms was still good. At
one point 50 of the 170 Phantoms had been earmarked for cancellation, in view
of Prime Minister Wilson's decision to phase out the three British carriers
when the East of the Suez withdrawal would be completed in 1971. The initial
cabinet thinking was that the cancellation of 50 Phantoms would save the F-111K
order, or at least most of it. However, in consideration

Chapter 11

RAF Phantom carrying SPARROW missiles.
Marconi Space and Defence Systems has
developed the XJ421 variantof this missile.
Photo by courtesy of Marconi Space and
Defence Systems Ltd.

NATO'S FIFTEEN NATIONS

of the fact that the Phantoms were so far down the pipeline, and that it would
have cost as much to cancel them as to take delivery, there was no Phantom
order cut. The same reasoning applied to maintaining the order for 66 Lockheed
Hercul es as wel 1 .

The Ministry of Defense declined to give a unit price for the 170 Phantoms on
order at the time of the January 1968 budget cut, although it did indicate
that a few on the end of the order might eventually be cancelled. A defense
offical stated simply that "we won't give the price, but we are paying more
than the U.S. because we are pushing so much British equipment into them.

This is a very sore point with me. "6

What was known was that the Phantom had been Anglicized by about 46% of the
total unit cost, with the Rolls-Royce Spey bypass engine as the major portion.
The decision to Anglicize the airplane had called for a number of basic but
costly design changes. In addition, there had been expensive delays due to
problems with the Spey after burning system, and with the matching of the West-
inghouse radar with the Ferranti navigation-attack package. ?

An assistant secretary of the Ministry of Technology (the procurement authority
for the British armed services at this time) finally informed the All-Party
Pari i amentary Committee of Public Accounts in August 1968, that the unit cost
of the Phantom had doubled from $2.4 to $4.8 million, because of the decision
to re-engine it with Spey engines. After taking into consideration the Navy
and RAF's preference for an off-the-shelf purchase of the Phantomusing the

Chapter 11

G.E. J79 powerpl ant , another assistant secretary at the Ministry of Technology
told the committee that the decision to continue with the Spey was made on
primarily industrial grounds.

In addition to the general industrial considerations, Ministry of Technology
officials justified the decision on the grounds that the Spey had later been
selected for the U.S.N./Ling-Temco-Vought A-7A Corsair. The Spey also allowed
the Navy and RAF Phantoms an increased combat air patrol capability over the
improved J79. In conclusion, in its report on the British Phantom cost increase,
the Pari i amentary Committee of Public Accounts noted: "We have no wish to
question the decision to continue with the Spey-engined Phantom in spite of
the large increase in unit cost, but regret that the earlier decisions, and in
particular those made in 1965 to purchase the UK versions, should have had to
be made on the basis of totally unreliable estimates and before the costed
technical program for the engine was received. "8

"The purchases of the Phantom aircraft, contrasted with the purchases of Lock-
heed Hercules aircraft, demonstrate that when off-the-shelf purchases are made,
the benefit of reduced cost arising from long production lines can be totally
lost if the standard version is substantially modified. "9

The problem of the degree to which one modifies the configuration of a foreign
system to meet peculiar national military and industrial requirements surfaces
most often in license production programs (Modes #1, #2, and #4), and especially
those where the U.S. is on the licensee end, i.e.. Mode #4. The most recent

Chapter 11

and visible case involves the production of the U.S. Roland version of the
Franco-German Roland II all-weather short-range air defense missile system by
Boeing and Hughes for the U.S. Army.

2. F-111K Order

The cancellation of the TSR-2 aircraft was announced by the Chancellor of the
Exchequer, Mr. Callaghan, on April 6, 1965. Up till that time the TSR-2 had
been regarded as the lynch-pen of the RAF in the 1970's. For the U.S. this
opened up the prospect of being able to capture the British advanced military
aircraft market with the USAF/General Dynamics F-lll vairabl e-sweepwing aircraft,
a plane just then coming into production. The British Government was promptly
granted an option to purchase the F-lll, exercisable up to March 1, 1966. Given
the size of the deal a substantial 'offset' became critical for the purchase,
expected to be worth about $1 billion.^

The DoD ultimately agreed to a total offset figure of $725 million for the
F-lll purchase and in 1967, after two years of negotiations Britain committed
to a buy of 50 F-111K fighter bombers. The sale price of approximatel y one
billion dollars was to be paid over a twelve-year period with the first delivery
guaranteed by 1970.

The offset agreement contained two elements. First, the DoD agreed to waive
the 50% price handicap for foreign firms, applicable under the Buy American
Act, and thereby allow British firms to compete on even terms with American
companies for $325 million worth of American defense contracts through 1977.

Chapter 11

Second, the DoD agreed to join with Britain in securing $400 mil ion worth of
arms sales to third countries. Although, the total offset figure of $725
represented about 75% of the aircraft's cost, the British were well aware of
the difficulty of actually securing this amount - these figures being ceilings
only, involving no guarantee of the final amount. H

While the negotiations with the British over their purchase of the F-lll slowly
progressed, what was needed was a positive indication that a substantial propor-
tion of the offset would be obtained. Accordingly, the concurrent U.S. nego-
tiations with Saudi Arabia assumed a new significance. Although, Mr. Henry J.
Kuss, Jr. (who was head of the International Logistics Negotiations (ILN) sec-
tion of the DSAA) and British Defense Minister Denis Healey differ in their
descriptions of the events that led up to the award of the major part of the
Saudi contract to British industry’, Healey's version being the more specific
of the two (besides having nothing to hide), seems the more credible. The DoD
apparently allowed the British to include the Raytheon Hawk surface-to-ai r
missile in their package with the Lightning supersonic fighter. Moreover, as
Mr. Healey stated, the Americans "undertook to stand aside" and allowed British
industry to move up from a position of a non-starter and beat out the Lockheed
F- 104 and Northrop F-5. Kuss denied any such complicity of the DoD. Healey
was further quoted as saying "we could not have made the offer, never mind won
the contract, without American co-operation." Hence, at the time when Britain
agreed to the purchase of the F-lllK's, the prospective package deal with Saudi
Arabia was specifically included in the F-111K offset arrangement. Even though
the Lighting-Hawk package deal had not yet been finalized, it did considerably
facilitate the British decision to buy the F-111K. ^

Chapter 11

Britain eventually received some $275 million for her part of the Saudi package:
the Lightning fighters; the Jet Provost trainers; radar installations; and
communications equipment. Britain received another $20 million for Tbunderbird
surface to air missiles to fill in as an interim air defense system pending
delivery of the Hawk systems.

The outcome of this U.S. -UK arrangement resulting in the Saudi's obtaining of
the Lightning in lieu of the F-5 or F-104, engendered further controversy, as
it was militarily highly questionable. The Lightning was designed as a high
performance interceptor for defending Britain's small air-space of some 89,000
sq. miles. For Saudi Arabia which is some 9 times larger (800,000 sq. miles
in extent), it is open to doubt, whether Britain's U.S. supported package
deal represented the best choice of weapons for Saudi Arabia. ^

Another inter-ministerial understanding did not work out quite as well, this
onp ' ig after the British buy. Part of the offset agreement included an
understanding that the U.S. would allow the British to tender on equal terms
with American Companies for 16 wooden-hulled minesweepers worth approximately
$80 million. But in September 1967, John W. Byrnes, Republican Congressmen
from the shipbuilding district in Wisconsin whose bidder was directly threatened,
introduced an amendment to a defense appropriations bill, proposing that all
U.S. naval vessels be built in U.S. yards. The amendment was eventually passed
into i aw . 4

As was pointed out in a number of British newspapers, with some bitterness,
Britain's obligation to buy the F-lllK's was subject to a binding contract.

Chapter 11

while the U.S. obligation to buy minesweepers rested simply on a series of
inter-ministerial understandings. A London Times editorial stated "the s pi ri t
of the offset agreement has been broken in Washington to an extent that must
jeopardize British confidence in the future of artificial arrangements of this
kind. "15 Yet, it was not Washington, but London, that would soon pull the rug
out from under the arrangement.

After the November 1967 devaluation of the pound the British Government was
forced into a series of public spending cuts so as to reinforce the credibility
of the prior gesture. Included in this series of cuts were the National Health
Service, school programs, publio housing, and the order for 50 F- 1 1 1 K ' s . This
cancellation of the F-111K orders involved such other contributing factors as
the decision to- retreat from east of the Suez which lessened the need for the
airplane, while the planes' desirability also decreased due to performance
problems and the cost having more than doubled. 15

The 50 F-lllK's were to be the core of the recently formed RAF Strike Command
and consequently this Command would no longer have deep-strike capability, in
view of the age of the Canberras and V-bombers which the F-lllK's were supposed
to replace. 1?

Prime Minister Wilson claimed that cancelling the F-111K would save the British
Government about $960 million over the next 10 years, $700 million of which
would be in dollar costs. 18

Chapter 11

This left the situation unclear though, with regards to the complex offset
sales agreement with the U.S. which was meant to cover the dollar expenditure
of British buys in the U.S. which amounted to an offset commitment of $825 at
the time of cancellation (the DoD had recently increased its offset commitment
by another $100 million as an additional disincentive to the pending cancella-
tion). Though it was expected that the approximate total of $460 million in
the existing offset sales already made over the two years that the offset agree-
ment had been in force were still good, it appeared that as far as future off-
set sales were concerned that the agreement was dead. It was generally con-
sidered at the time (and correctly so as it turned out) that the existing con-
tracts already in the pipeline would survive since the U.S. would have had to
pay cancellation charges to British vendors, and programs would have to have
been delayed for a new round of competition for equipment to replace the can-
celled items.

While shocked by the British decision to completely cancel the F-111K, the
Johnson Administration was naturally reluctant to make any overt moves of recrim-
ination or retaliation.^ In any case, Britain still had substantial commit-
ments in the U.S. - particularly for the F-4 Phantom and C-130 Hercules orders -
and as such offsetting considerations still applied to some extent, although
not in line with the F-111K agreement. 20

One positive aspect of this F- 11 IK offset sales agreement was the significant
contribution it made to the remarkable recovery of the British aerospace industry
following 1964-65 series of cancellations. Although, eventually aborted, during

Chapter 11

British Offset Contracts in U. S

Equipment Approximate value

(millions ot dollars)

U.S. Air Force

Handley Page Jetstream aircraft 5.75

U.S. Navy

Radio frequency equipment

Shuttle assemblies

Two survey ships . . . .

Three salvage tugs

Piston assemblies

Arrester cables

Boiler tubes

U.S. Army ,

Dracone oil transporters. ............

Assault trackway

Tobias battlefield intruder alarm system

U.S. Defense Supply Agency

Barbed wire

Steel pipes and tubes

Construction equipment (posts, bolts) .

.0.12

0.14

16.73

24.09

0.04

0.02

.0.01

0.10

0.47

0.01

1.30

0.20

1.30

U.S. industrial prime contractors

Rolls-Royce Spey engines 82.0

Elliott Automation head-up displays 41.3

Elliott crosswind steering computers (C 5A) 1.47

Machine tools 2.73

Air data computers 2.0

Energy management computers 0.90

Artificial feel simulators . 0.40

Approximate total direct sales 180.98

British share in Saudi Arabia defense package 280.0

Total approximate offset contracts 460.98

Source

Aviation Week and Space Technology

its existence, the offset agreement had ... "spurred such British companies as
Ell iot-Automation and Handley Page into sharp, successful forays into the
Ameri can market ... "21

As one senior British executive put it, "since the offset, we've set up the
machinery to keep up the sales pressure. But most of all we broke out of the
island complex and took our products into the toughest market of all and won
an equal terms. "22 Hence, the offset agreements were instrumental in estab-
lishing a foothold for British avionics firms in the U.S. military market, a
foothold from which the British firms have since succeeded in expanding into
the U.S. civil market.

On the negative side, in addition to the inevitable unit cost increase for the
U.S. F-lll's resulting from the British cancellation there is the all too evi-
dent fragility of such complex arrangements. Not only are they built upon
ministerial understandings and, therefore, vulnerable to unilateral decisions
of the sovereign authorities in either nation, but they are extremely difficult
to implement without resulting in considerable ill will.

Chapter 11

B. THE FRG F-4 OFFSET, 1968-1974

1 . The Agreement

On November 7, 1968 the U.S. Assistant Secretary of Defense for International
Security Assistance (ISA) and the State Secretary of the German Federal Ministry
of Defense (FMOD) signed a multi-year (1968-1975) cooperative logistics agree-
ment for the procurement of RF-4 ai rcraft by the FRG. The agreement's official
title was "US/FRG Cooperative Logistics Agreement in Connection with RF-4
Procurement." This agreement involved a pledge undertaken by the U.S. Govern-
ment to use its 'best efforts' with McDonnell -Dougl as Corporation (MDC) and
ot-her U.S. contractors to place $125 million worth of contracts with German
firms, 23 but specified that any contracts offered to German industry would
also be offered to American firms, being awarded to the lowest bidder. The
German aerospace industries could obtain these contracts by being either the
low bidder, or simply through the German Government subsidizing the difference
between the American and German bids, at its discretion .24

This industry offset was backed up as well by a U.S. Government guarantee to
place up to $50 million in contracts to German industry to cover any industry
short fall of the $125 million goal. Although the U.S. had agreed to allow
German firms to bid on components for the F/RF-4 aircraft produced by McDonnell
Douglas, the Germans apparently were rather sceptical of this offer. The
vagueness of the term "best effort", and the stipulation that German subcon-
tractors be price competitive with American firms that had been involved in

Chapter 11

producing such component assemblies for some years, had made the Germans push
for some sort of guarantee. 25 The U.S. finally consented to the $50 million
back up guarantee which was to be Phase II of the arrangement. The consumma-
tion of the above agreement cleared the. way for final approval by the Bundestag's
budget committee for the procurement of 88 RF-4 aircraft plus supporting equip-
ment and services. 26 in return for this pledge of the U.S. Government to make
its best efforts to obtain U.S. industry compliance, Herr Schiffers of the
FMOD, signed the LOA (DD form 1513) legally binding itself by contract for the
purchase of 88 RF-4 aircraft two weeks later on November 21, 1968, for $415
million.

On October 31 , 1968, in anticipation of the signing of the agreement, McDonnel 1 -
Douglas applied with the Office of Munition Control (OMC) of the U.S. Depart-
ment of State for a license to export technical data to German Industry. The
data was to include specifications and drawings necessary for preparation of
bids on 23 different RF-4 structural components for 288 aircraft. The license
was rushed through and approved on November 4.

2. Background

In January 1968 the Luftwaffe had made a fundamental decision for two wings of
McDonnell Douglas RF-4E reconnaissance strike fighters to replace the 80 F- 1 04G ' s
lost in crashes since 1961. This Luftwaffe decision however, was faced by
strong opposition from some elements of the Defense Ministry and the Bundestag,
which were pushing instead for production of an advanced version of the F- 104
for this mission, the RF-104G1 .

)

Chapter 11

It was understood that some form of German industrial participation would be
necessary whichever choice prevailed, since such participation was essential
to the viability of the German aerospace industry during an expected 1971-1973
production gap before production was to have begun on the replacement aircraft
(one that was eventually to evolve into the MRCA Tornado). The advantage of
the RF-104G1 option was that it could be produced, even in small numbers, with
tooling already available. For the RF-4E several coproduction schemes were
considered .27 Complete fabrication in the FRG was briefly considered, but
unless an unlikely total of 180 or more aircraft were ordered, this would not
be feasible. 28 The proposal considered to be the most likely choice at the
time was one in which German industry, probably Messerschmi tt , would build
such fuselage components as the aft section, outerwings , engine doors and
canopies. In addition Man Turbo would build about 50% of the General Electric
J79 engine (which it had built in the FRG for the F-104G program, the G.E.

J79 being the engine for both the F- 104 and the F-4).

This German work was expected to amount to around 25% of the total cost of the
program, whether the final assembly was done in the FRG or the U.S.29 in the
end, however, the defense and finance ministries opted for an off-the-shelf
buy of U.S. produced RF-4E in order to minimize costs. 30

As is normal in such controversial decisions a number of conflicting interests
had to be reconciled. The Luftwaffe wanted the RF-4E because it considered it
the best available aircraft for the mission. The Luftwaffe did not consider
the reconnaissance version of the F-104G acceptable because of its previous

Chapter 11

performance record. On the other hand, the West German Aerospace industry
undertook a considerable lobbying effort with the Bundestag and the Ministry
of Defense in support of its view that reconnaissance version of the F-104G
could fill the need. Industry's major argument in support of the F-104G variant
(and therefore licensed production in the FRG) was that the RF-4E was a much
more expensive aircraft, and one that would cut into the funds available for
the MRCA, expected at that time to enter production in 1975. In addition,

German industry and government opponents of an RF-4E buy, as well as large
segments of public opinion, felt that the Phantom was being forced upon them
by the U.S. The considerable resentment to U.S. pressures was symptomatic of
the changing German attitudes with regards to NATO and defense generally, but
also the promotion of its own technological base through greater indigenous
aerospace work. 31

Meanwhile, in addition with pressures from the U.S., the French government was
also placing diplomatic presure on the German government toward selection of
the Dassault Mirage 3R.

The replacement decision was to have been made in May 1968, but was delayed
until the fall session of the Bundestag. The decision, one which was expected
to face extended debate, had to be delayed as a result of the protracted debate
over giving the government emergency powers in revolts.

In October 1968 three new factors surfaced that were to prove decisive in weaken-
ing the resistance to the off-the-shelf RF-4E buy. One was that the current

Chapter 11

CDU Defense Minister Gerhard Schroeder was expected to be his party's candi-
date the following year for the Presidency of the FRG. Since Schroeder had
backed the RF-4E buy throughout the long debate, the CDU members did not want
to be in a position of opposing their leader. 32

Another factor was a proposal made by Henry J. Kuss , Jr. , the U.S. deputy
assistant defense secretary for International Logistics Negotiations (ILN).

Kuss offered the FRG a wide-ranging aerospace license and subcontracted produc-
tion plan worth between $50 and $100 million on condition that the FRG order
the RF-4E by December 1, 1968,

The basic points of the Kuss proposal were:

"Buy American" act would be waived in considering bids by the German aero-
space industry (and German components would enter the U.S. duty free).

West German companies invited to make competitive bids will be given large
enough orders to ensure competitive conditions.

Any available excess tooling for the job in the U.S. will be offered at
reasonable prices to the FRG.

Technical data and manuals necessary to initiate production will be made
available to West German industry for the cost of reproduction.

Chapter 11

U.S. State and Defense Departments will help in clearing export licenses
required for bidding. 33

The third factor was that of the U.S. resorting to one of its common techniques
with the FRG, one that might more politely be called 'arm-twisting'. This
involved the new, tougher demand made by the U.S. Defense Secretary that the
FRG pay more to help offset troop-stationing costs, otherwise the U.S. would
have to reduce its tactical air and troop strength in the FRG. The year 1968
also happened to be the year that Senator Mike Mansfield was spearheading a
major drive in Congress to do just that.

3 . The U.S, -FRG Troop Offset Agreements Covering 1968-1971

Originating back in 1959 as a mechanism for offsetting the large dollar drain
caused by the stationing of U.S. troops in the FRG, these agreements continued
through the 60' s and up to the mid-70's before they were terminated. These
annual or bi-annual agreements developed into a predominant feature of U.S.
arms sales to Europe during this period. However, they gradually became an
increasing irritant as the FRG equipment requirements became less pressing
after the mid- 60' s . This was also accompanied by a resurgence of German
nationalism. Here it is worth taking a look at those agreements covering the
1968-71 period to see how they were interrelated with the German F-4 buy, the
cost of which involved basically two elements. Roughly 30% involved industrial
offsets to the FRG, and the remaining 70% counted toward the dollar cost of
troop stationing incurred by the U.S. government.

Chapter 11

In July 1968, the German government agreed to offset 75% of the costs of station-
ing U.S. troops in the FRG during Fiscal 1969. Since the decision on the
replacement aircraft for those F-104G1 s lost through crashes had slipped, and
had not been made in May as planned, the RF-4E purchase was not to be included
in the agreement.

The U.S. had asked for a full offset of $800 million, but accepted $100 million
in purchases of unspecified military equipment, plus $500 million that the
Bundesbank would take in medium-term U.S. Treasury bonds due in 10 or 12 years.
The German government also undertook to persuade a German banking consortium
to purchase an additional $100 million in bonds during the next fiscal year. 34

As reported in Aviation Week & Space Technology, one observer in Germany termed
the agreement "a bookkeeping ploy, designed for the U.S. election year." He
said the $100 million in military purchases is not really an offset because
the Germans probably would have bought that much anyway. He said the offset
amounts to a loan from the German government which the U.S. will not carry on
the books as a liability as it would a short-term loan. 35

Another source acknowledged to Aviation Week & Space Technology that the Germans
have "acute financial problems at home" which were not helped by the recent
mild recession. Not only would it be a political liability for the FRG to buy
too much from the U.S. — since German companies would object— but "they can't
afford to buy anything just for offset and then have it sit and rust through
lack of funds or personnel to operate it. "36

Chapter 11

An offset agreement for the British Army of the Rhine (BAOR) was also concluded.
Of the $180 million in the total agreement, $50 million worth of British bonds
were to be bought and the remainder would be accounted for in purchases of
British goods by government or private organizations.

The other foreign countries maintaining military units in the FRG— Belgium,
Canada, France, and the Nether! ands— had not asked that their costs be offset
through some such explicit arrangement.37

In July 1969, the U.S. government reached a two-year offset agreement with the
FRG for $1.5 billion or 80 % of the total U.S. bal ance-of-payments costs in
connection with stationing of forces there, one covering the period July, 1969
to July, 1971.

In the agreement signed by the U.S. and the FRG covering the period July 1969-
July 1971, the FRG agreed to buy $925 million worth of U.S. equipment. This
was about 60% of the $1.52 billion to be offset in the two-year period. The
remainder was to be accounted for by financial transactions. In addition,
there was another $300 million held over from previous such agreements.

Over the two year period, most purchases of U.S. mi 1 i ta ry equipment were to
involve some degree of co-production. Major projects included:

McDonnell Douglas RF-4E, $300 million (excluding offset work);

Sikorsky CH-53 , $115 million (treated in Chapter 6);

Bell UH-1D, $80 million (assembled by Dornier);

Chapter 11

North American 0V-10Z target tow aircraft, $10 million, and;

Luftwaffe pilot training in the U.S., $10 million.

These purchases and other, non-aerospace defense orders left about $400 million
that had to be spent on U.S. military equipment over the 1969-71 period.

The German offsets for British mi 1 i tary -equi pment were averaging about $50
million annually, and the commitment covering the 1969-71 period was settled
with the purchase of 22 Westland SH-3 search and rescue hel i copters .38

As for the financial part of this two-year agreement (40% of the total), the
FRG pledged to buy $250 million worth of U.S. Treasury bonds with 10-year
maturity at 3.5% interest. Past offset loans were made on a short-term basis
at prevailing interest rates, an arrangement which reportedly caused consider-
able resentment in the U.S. government. In addition to agreeing to accept
lower interest payments from the U.S., the Bonn government also agreed to apply
$32.5 million of past interest credits to military purchases in the U.S. 39 The
FRG was also to buy $118 million in Export-Import Bank and old Marshall Plan
debts owed the U.S., and prepay $44 million of other German debts. A final
move, under the agreement, was the establishment of a special fund of $150
million for German investment in the U.S. The investment fund would carry
commercial interest rates in contrast to the arrangement on U.S. Treasury
bonds .40

These favorable offset terms were again successful in relieving pressure on
the Administration from Congress to reduce U.S. force commitments in Europe,

Chapter 11

on the grounds of the U.S. bal ance-of-payments (BOP) problems. Sen. Charles
H. Percy (R.-Ill.), who had recently attempted to win European support for a
multi-lateral offset arrangement, called the new agreement "a major step toward
creating a sounder financial basis for U.S. expenditures in the North Atlantic
Treaty Organization." He said a multi-lateral approach was still desirable
because it would eliminate what he called the "agonizing, disturbing and humili-
ating bilateral negotiations that endanger German-Ameri can rel ations ."41

4. Fulfillment of the Offset

On November 11, 1968, the first bid packages were released by McDonnell Douglas
involving wing flaps, rudders, main landing gear, canopies and windshields.

On November 18, packages were released for outer wing panels and pylons. A
final series of bids were released November 25 and involved engine access doors,
empennages, horizontal tail surfaces, radomes and tail assembl ies .42

The following June, 1969, two German aerospace companies, MBB and Dornier, won
subcontracting awards for McDonnell Douglas F-4 fighters that were to be
delivered to the U.S. Air Force and Navy, as well as the Luftwaffe. The
Messerschmi tt-Boel kow-Bl ohm group was to supply the aft fuselage, including
the fin and tail cone, rudder, two engine access doors, ailerons, outer wings,
inboard and outboard spoilers and main landing gear doors. Dornier was to
furnish an engine access door and the center leading-edge flap. The bids that
were submitted were reportedly lower than the cost of the items being produced
in the U.S., due to substantial German government subsidies in the program. 43

Chapter 11

General Electric, meanwhile, told German engine companies that it was willing

to contract work to them not only on the J79. that powers the F-4 , but also on

T64 , CF6 , and TF39 engines.

The first increment of airframe components had been for 100 ship sets and
amounted to $20 million, and bids were submitted for options on an additional
200 ship sets. Orders for the additional 200 ship sets, however, were not to
be forthcoming for several years because of a downturn in F-4 sales world-
wide. This and other problems that arose in the interim are treated in the
following section of this sub-chapter.

In November, 1972, the OSD (DSAA) granted authority to the Project Office to
proceed with Phase II activity, that is, the back-up guarantee of the U.S.

Government placing contracts with German industry up to the $50 million ceiling.

The Project Office cited one specific potential contract by the US AF Europe
for its F-4 aircraft with MBB for around $15 million. This possibility was
put to rest, however, the following May when both the U.S. and the FRG agreed
that there would most likely be no need for it. As such the DoD never had to
supplement the industry- to-i ndustry offset contracts with its own offsets.

On B May, 1974, the last U.S. /FRG meeting was held to formally terminate the
1968 Agreement, the $125 million offset having been fulfilled. Additonally,
all U.S. firms involved in the Agreement's implementation were advised that
the special procedures for processing export 1 incenses, bid packges, and tech-
nical data were no longer in effect. 44

Chapter 11

The official total of offset contracts reached by the end of each Fiscal Year

was :

Fiscal Year

1970

1971

1972

1973

1974

Dol 1 ar Val ue
7.7 M

15.8 M
76.4 M45
120.3 M
125.0 M

The German aerospace industry had in fact received about $136 million in credit-
able offset contracts by the termination date. But beyond this German industry

had obtained several major licenses and proprietary manufacturing processes,
the value of which was never counted toward the offset. In addition some $44.04
million in orders resulting from two of these licenses was never counted .46

5 . Key Issues: the Berry/Peterson Study

The slow start in implementing the Agreement, by placing offset contracts with
German industry became an issue of major concern in the German press and German
politics. During the first several years following the signing of the contract,
this led to strong criticism of the U.S. handling of the program from within
the FRG. The bad publicity hurt U.S. credibility. The August 11, 1969 edition
of Per Spiegel attacked the program for offering only crumbs ( i . e . , small quan-
tities of low technology components) to German industry for bidding.

Furthermore, Per Spiegel claimed that the minor quantity of items offered for
bidding, placed German industry in an uncompetitive position vis-a-vis U.S.
firms; German industry only getting what little it did becuase of German Govern-
ment subsidy. As this developed into a major political issue over the following
month, during the closing days of the German elections that fall. Defense

Chapter 11

Minister Schroeder had to forcefully deny these claims and others such as
charges that German industry would receive only $25 mill ion - instead of $125
million.

The DoD reacted to the initial insufficiency of the contract awards to German
industry, and the Herman sensitivities in this respect, by shifting its policy
in the fall of 1969.47 up till then, the DoD had seen its role to be one of
monitoring contract award status and minimal involvement in industry-to-industry
interactions. The shift led to the DoD 1 s assuming the role of an active coordi-
nator and initiator of industrial activity.

A thesis by Arnold M. Berry and Edward A. Peterson entitled RF-4 Coproduction:
The United States and the Federal Republic of Germany presented in January,

1975 to the Air Force Institute of Technology (AFIT) covered the history of
the DoD!s role in the project in considerable detail. The following paragraphs
draw from this thesis in treating several major issues that arose during the
program, as well as Berry and Peterson's conclusions and recommendations.

Berry and Peterson believed "that the only major problem in the coproduction
effort stemmed from the lack of specific and objective guidelines in the
Agreement. Although, there was some confusion over the meaning of "best
efforts", it became relatively unimportant when compared to the administrative
difficulties caused by the lack of detailed parameters and criteria to determine
what type of coproduction contracts would be credited toward the $125 M offset."

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The agreement did not specify that the $125 million in contracts had to be on
f/RF-4 components but only that this was preferable. The types of contracts'
that would be creditable became a key political issue throughout the life of
the agreement, the two governments having very differing views of the permissive-
ness that could be used in reaching the $125 million goal. The FMOD viewed
this Agreement as restricting credi tabi 1 i ty to RF-4 and F-4 components, whereas
the U.S. did not recognize this restriction. When the production rate of the
F/RF-4 had slowed due to a lack of incoming orders, McDonnell Douglas found
that it couldn't submit requests for quotations (RFQ) for F-4 components to
the Bundesverband der Deutschen Luft-und Raumfahrt Industrie (BDLI)48 in suffi-
ciently large quantities for German industry to be competitive. It therefore
offered DC-10 work instead, but the FMOD rejected these as not creditable. It
also refused to allow G.E. offers relating to the modification of Luftwaffe
F-104G engines. In addition the FMOD held that the value of contracts granted
by the FMOD directly to German industry to provide equipment to McDonnell Douglas
as German Government Furnished Equipment (GFE) were not creditable either,
even though U.S. industry (with U.S. Government approval), i . e . , General Electric
and Litton, had granted the license which allowed these orders to take place
under the assumption that they would count toward the offset. They did even-
tually compromise though, on this latter point, and accepted a percentage of
such contracts (around 30%) as creditable. If there had been clear criteria
for creditability such disagreements could have been avoided. ^

Another weakness that Berry and Peterson found with the Agreement was that it
was not balanced in its distribution of responsibilities. They found it to be
biased in that it . . .

Chapter 11

did not require the German Government to do anything to make German
industry even accept or attempt to be competitive with U.S. industry.

The absence of any commitment by the German Government to also use
its "best efforts" toward reaching the $125 million objective had
the effect of increasing the United States' responsi bil i ty.50

As for the highly visible difficulties of the German contractors in competing

effectively with U.S. firms. Berry and Peterson felt that this was not a major

probl em .

The apparent inability was really caused by the difference in contract
procedures between the two countries. Once, the German Government
and the aerospace industries had the time between 1968 and 1971 to
adjust their bidding procedures to be compatible with the U.S. sub-
sidy program with U.S. defense contractors, Germany was able to
effectively compete with U.S. firms. 51

One must qualify this statement by Berry and Peterson however, by pointing out
two other factors. One, the fact remains that, though this problem was worked
out over time, the several years it took to do this resulted in a great deal
of unfavorable publicity. Secondly, a major determinant that finally allowed
a second bid package and the submittal to the BDLI of orders based on larger
production quantities to be placed, was that the FRG ordered an additional 175
F-4's in 1971. Therefore, in addition to the bidding procedure/subsidy aspect
of the competitivety problem, the additional F-4 order by the FRG was also a
significant factor contributing to the breakup of the log jam.

The Foreign Military Sales Division, F/RF-4/Sparrow III Project Office, Naval
Air Systems Command (NAVAIR) had been given the responsi bil ity of coordinating
and monitoring the implementation of the Agreement, thus becoming the focal
point of all related information and actions. The principal issue that the
authors were concerned with, concerning the Project Office, was whether it was
at the correct level of governmental authority to effectively and efficiently

Chapter 11

carry out its responsibilities. This is an issue that has continued to resur-
face in other joint production programs since (e.g. , F-16, AWACS ) , and as such
the following quote has continued to be relevant to such programs.

From the standpoint of efficient and effective implementation of the
coproduction project, the Project Office was not at the correct level
of authority. The Project Office was not able to initiate procedures
or make firm commitments without coordinating with agencies higher
in the hierarchy. This upward coordination usually went as high as
DSAA, but on some occasions, it was to the OASD/ISA and on several
occasions to the Assistant Secretary himself. The delays required
for the communication up and down the chain of command hampered the
ability of the Project Office to function at full efficiency. The
Project Office developed a viable and specific plan to implement the
coproduction agreement, but the fact remains that the Project Office
was not tendered the authority to make key decisions and commitments.
The delegation of sufficient authority to the Project Office, or the
shortening of the command channel by placing the Project Office
directly under Director of Military Sales and Assistance within the
OASD/ISA would have alleviated the problems associated with the lack
of authority in the Project Office. 52

One of the important side issues that developed out of this Agreement was the
differing interpretations of F/RF-4 FMS management resonsi bi 1 i ties at the
working level within the DoD. The Navy and Air Force were in disagreement as
to who was responsible for the overall execution of the F-4 sales program. It
was not until August, 1970, that the Deputy Assistant Secretary of Defense for
Military Assistance and Sales issued a memorandum stating that the NAVAIR
Project Office had the lead in the U.S./FRG Cooperative Logistics Agreement

program. 53

The final issue treated by Berry and Peterson was whether any policies and
procedures were established during the Agreement's implementation that could
be useful in the formulation of future joint production programs:

Chapter 11

The definitive implementation plan developed by the NAVAIR Project
Office was and is critical in the implementation of any international
logistics program. The virtues of good planning need not be discussed
because they should be obvious to any responsible modern day manager.
The implementation plan for the Agreement provided visibility and
confidence to U.S. and German industry that the U.S. Government was
seriously committed to the fulfillment of the Agreement. Addition-
ally, and most important, the plan exposed the channels of communica-
tion that provide coordination and information.

The identification and broad advertisement of the focal point in the
form of a management office to implement the program was important.
However, there must be more communication between the focal points
of the two respective countries in the form of exchanging plans and
status reports.

The format of the status reports written by the NAVAIR Project Office
were excellent because they provided cumulative information so that
anyone could quickly be brought up to date and become involved in
the program. This would seem to be important to industrial firms
because it would save them time and expedite their possible involve-
ment in the program. 54

Chapter 11

C. INTRA-EUROPEAN OFFSETS, 1967-70

During the same period (1967-70) that the DoD was getting its feet wet for the
first time with regards to the rude world of offset agreements (i.e. the agree-
ments accompanying the British F-111K order and the German F-4 Phantom buy)
several of Europe's continental defense industries were beginning to make impor-
tant in-roads into other Western European markets, an area previously dominated
by the U.S.

This market penetration during the late 60 1 s was greatly assisted by the offering
of bi-lateral offset agreements to the purchasing nations. The previous two
U.S. offset agreements had not been offered by the U.S. government simply as
competitive inducements, but primarily as efforts to smooth the way politically
and industrially for the purchasing allied government to fill a major military
requirement. In neither case was there any serious foreign competition. On
the other hand the European offsets of the same period covered in this sub-
chapter, could be characteri zed more along the lines of a teaming of national
governments and industries in attempting to break out the U.S. strangle hold
on third country sales in selected product areas (e.g. tanks for the FRG and
light fighter air-craft for France and Sweden).

1 . The Belgian, Dutch and Norwegian Purchase of the Leopard Tank

In 1967 the FRG made her first major post-war penetration of the intensely
competitive Western European arms market with the sales of the Leopard I tank

Chapter 11

to Bel guim.55 The following year, the Netherlands and Norway also, both bought
the Leopard. Each nation's selection of the Leopard, though not exclusively
dominated by offset considerations, was in good part influenced by them. The
FRG, with her strong foreign exchange position can be much more generous than
either the U.S. or U.K. in this area. Both of these latter two are dependent
on arms exports to bring in much needed foreign exchange. Another considera-
tion relevant to Belgium and the Netherlands that goes beyond NATO, are their
extremely tight economic and financial relationships with the FRG, displayed
in, and further reinforced by, their continual participation in the Deutsche
Mark centered European Snake from 1972 up through the creation of the European
Monetary System (EMS) in early 1979, and the EMS since.

To Belgium, the Germans offered a mix of government provided military and non-
military external offsets, while the German Leopard manufacturer, Kraus Maffei ,
subcontracted to Belgian industry for certain parts of the tank. Collectively
the offset covered a full 100 percent of the purchase, or in other words there
was no BOP effect over the long run. The total cost of the 334 Leopards pur-
chased by Belgium came to some $91.4 million: with some $44.3 million being
offset by German Government contracts to Belgian industries for munitions and
electronic goods, and for the overhaul in Belgian factories of German armored
vehicles; and with the remaining $47.1 million being offset by Leopard parts
production in Belgium and by the import into the FRG of a variety of Belgian
goods that would not have otherwise been imported. A similar 100% offset was
also provided for a related tank order by the Belgian Government at the end of
1968 for 36 recovery tanks and 6 engineer tanks .56

Chapter 11

The Dutch Government chose to offset the foreign exchange cost of its 415
Leopards ($112.8 million) by a fixed amount (as opposed to a percentage), one
which would effectively offset around 90% of the purchase. The German Ministry
of Defense agreed to make purchases of military goods in the Netherlands for
one-half the total, $56.4 million, plus Kraus Maffei undertook to place orders
in the Netherlands for military and civil goods for the other half, also
totalling $56.4 million. 57

The Norwegian purchase of the Leopard was within the framework of a remarkable
arrangement concluded in 1960 between the German and Norwegian Governments.

The arrangement involved a German commitment to purchase five Deutsch Marks of
either military or civil goods from Norway for every three Deutsch Marks of
military equipment that Norway purchased from the FRG, thus offering a consider-
able foreign exchange benefit to the purchaser to the tune of a 167% offset! 5§
These Leopard I orders were later followed by those of Denmark, Italy, and
more recently Canada virtually making the Leopard I the NATO standard. Italy
produced its Leopards under license (Mode #1).

2. Dassault and the Belgian and Spanish Offsets for the Purchase of the Mirage

Before getting into the specifics of either of these French offsets, it would
be worthwhile to point out several of the unique characteristics of Dassault-
Breguet that not only contribute to their propensity for such bi-lateral offset
arrangements , but also tend to limit them more than other European aerospace
firms to such forms of transnational collaboration.

Chapter 11

The success and efficiency of Dassaul t-Breguet can, in large measure, be attri-
buted to its small size and the concentration of its activities, as well as
special characteristics of its unique management approach. One of Dassault's
most important operating criterion has been its very heavy reliance on subcon-
tracting.^ This allows it to squeeze competing subcontractors on their prices
(it being much more difficult to squeeze costs out of one's own operations),
and it provides a cushion to keep the contractor's work force stable while
avoiding over capacity.

One factor contributing to the effectiveness of the Dassault organization with
regards 'to single-engine Mach 2 fighters®! has been the personal relationships
of a small team of men of great ability and mutual confidence in one another.
One key feature of such an organization is an absence of documentation. Marcel
Dassault's management philosophy includes the view that a group of 2,500
employees is the largest in which the impact of a single leader can be felt.®2

A high priority within the organization is also placed on resisting specializa-
tion, the view being that, while specialists tend to dig far deeper into their
own narrow field, the ultimate result is that they lose the ability to communi-
cate with other elements of the firm. While this view has its merits, it has
been suggested that the resultant trade-off may lead to a lack of sufficient
engineering depth to work on highly-advanced projects. ®3

As a result of the above characteristics of the Dassault organization, the
French government has been heavily reliant on Aerospatiale as its instrument

Chapter 11

in major collaborative projects. Although Dassault is often viewed as being
obstructionist in terms of large-scale international collaboration on a parity
basis, "the actual fact may be that it is not really very capable of adapting
to larger scale enterprises with other partners, given the inherent personalities
and organizational structures ."64 Therefore, Dassault has been specially adept
at collaboration where it has been based on subcontracting to other smaller
national industries on an ad hoc offset basis such as the Belgian and Spanish
Mirage purchases. It must be remembered that Dassault inherited the Atlantic^,
Jaguar66 anci Alpha Jet67 collaborative projects from Breguet as a result of
their merger. Moreover, although Dassaul t-Breguet and Dornier are equal partners,
for the most recent project, the Alpha Jet, Dassault was still t^e prime con-
tractor, and France played the lead role in the other two as well.

a . The Belgian Offset for the Purchase of the Dassault Mirage 5

In February 1968 Belgium selected the Dassault Mirage 5 ground support aircraft
over the Northrop F-5 and eventually placed an order for a total of 106 Mirages.
This was considered at the time to have been a significant step in the success-
ful French drive to establish themselves as the leaders of the European aero-
nautical industry. This sale broke a virtual aircraft monopoly held by the
U.S. in continental Europe since WW II. This also was in the wake of the French
withdrawal from NATO and the beginning of a less U.S. dominated alliance, and
at the peak of the French government and industry's crusade to counter ' Le
Defi America in'.

Chapter 11

Of significance here is the nature of the French offer that contributed to the
success. Much of the success of French industrialists in competing in Europe,
South America, Africa and the Mediterranean area since the mid-60's can be
attributed to carefully laid basis of industrial, financial, and cultural cooper-
ation. Add to these the political constraints on U.S. sales in many of these
areas and the agressive support of the French government generally, and more
specifically the better credit terms offered. These arrangements have had the
effect of developing strong working relationships.

The Mach 2.2 Dassault Mirage 5 ground support aircraft is essentially a Dassault
Mirage 3E jet fighter developed for the Armee de 1 "Air, but with a simplified
avionics system. Both are powered by the Snecma Atar 9C . ^8 y^g Mirage 5 was
designed specifically for the export market, since France did not plan on buying
any of the aircraft.

The U.S. Defense Department, for its part in the F-5 proposal, offered Belgium
a maximum 50-50 split in production of the aircraft. There was criticism,
however, that the American government had given up on the project several months
before and failed to push its case until the last. This left Northrop alone
in competing with the strong French government and industry effort in the
crucial final months of the competition. When the French buy appeared imminent,
the DoD did make an attempt to persuade the Belgian government to take past
American aid into consideration, but to no avail .63

Pressure for selection of the F-5 came not only from the U.S. but from the
Dutch government and aerospace industry as well. The Dutch, who had recently

Chapter 11

ordered the Northrop F-5 had been originally teamed with the Belgians to make
a common buy as they had with both Meteor and Hunter selections in the late
40 5 s and mid-50's both for joint production purposes and for continued standard-
ization of the two air forces. The Dutch and Belgians had joint pilot training
schools and owned some jet trainers jointly. 70 However, Belgian budgetary
problems had resulted in a delay and the Netherlands had to go ahead with a
selection on its own. In spite of this, the Dutch were still hoping that the
belated Belgian decision would still allow for commonality of equipment. This
Dutch-Bel gian teaming relationship had also been critical in expanding the F-
104G program from a German only program to a NATO program. The Belgium-
Netherlands team was later to form the core of the buying consortium that led
to the F- 16 Multinational Fighter project.

The Belgian order was for 88 Mirage 5 ' s with an option for another 18 aircraft,
one that was later filled. The Belgian order, valued at $150 million ranked
as the largest single military export order in French aerospace history.
Nevertheless, the price in offsets for the French industry was high, with some
observers at the time doubting their wisdom. 71 The offset production agreement
provided Belgium was industry provided and included a mix of both internal and
external offsets. Belguim's aircraft industry— SABCA (50% owned by Dassault),

Fa i rey and Fabrique National e—buil t 50% of the Belgian Mirage 5 ' s . As this
represented the limit of cost/effective participation by Belgian industry in
the production of its own aircraft, external offsets had to be introduced to
cover another 20% of costs. These included: involvement in the ill-fated
Dassault Mercure short-haul transport program; work on the Jaguar's Adour engine

Chapter 11

piece work on the Mirage F-l; and the possibility of participation in the final
development and production of the Jaguar. Twenty-six million man-hours of
work were guaranteed totaling 70% of the purchase price. 72

The fact that the Belgian government was under a caretaker government (nothing
unusual) at the time of the decision in February, tended to complicate the
picture on the precise number of aircraft to be ordered by Belgium, and as
such substantial funding could not be committed until a new government was
formed. Around $15 million was available, however, from the former government
for starting the program. Belgium's coalition government had collapsed earlier
in the month over the usual burning issue that has led to the collapse of many
governments before and since, language based disputes between the Dutch speaking
Flemish in the north and the French speaking Walloons in the south. Premier
Paul Vanden Boeyants , who resigned but remained as head of a caretaker govern-
ment, told firms involved in the Mirage 5 program, that the order could be
considered firm, since it had been under negotiation for the previous 18
months .73

b. Spanish Mirage 3E Purchase and the Concomitant Offset

The Mirage 5 sale to Belgium in early 1968 was followed two years later by
another similar but scaled-down industrial offset agreement between Dassault
and Spain's CASA in 1970.

Spain selected the Dassault Mirage 3E over the McDonnell Douglas F-4 in a com-
petition in early 1970. The Spanish order was for 30 Mirage 3 E ' s , the choice

Chapter 11

Le Mirage III NG, ici arme de Magic, sera une vedette du 35e Salon (Doc Aviaplans).

Air Actu

again being in good part influenced by the aerospace industry internal and
external offset package offered. Dassault agreed to place 6.3 million man-
hours of work with the Spanish aerospace industry. This amounted to some 20 %
of the $90 million value of the Mirage contract. CASA built 45% of the Spanish
Mirage airframe and received work on the Mercure as well .74 The French Govern-
ment also threw in an offset of a more purely long-term political nature.

France agreed to be Spain's sponsor in its efforts to join the EEC (later to
become a very ticklish affair, as France (and its agricultural industry) in
fact by the late 1970's had become the principal obstacle to Spanish
membership) .75

Spain's overall objective in demanding an industrial offset was one common to
most such offsets and indicative of the direction that the European aerospace
industries have been taking. The explicit objective was to further develop
the 5,000-man Spanish aerospace industry so that it could be a full partner in
future collaborative European programs. 75 (a successful policy that led shortly
thereafter to Spanish membership in Airbus Industrie through the participation
of CASA.)

An additional factor contributing to the selection of the Mirage 3E over the
F-4 is noteworthy. Similar to the prior competition in early 1968 when the
Mirage 5 won out over the F-5 in Belgium, is the role played (or better yet,
not played) by a component of the U.S. Government. This role was also somewhat
indicative of the priority given by the U.S. Government at that time to timely
action in the promotion of U.S. military exports and related cooperation.

Chapter 11

Spain's original preference for the F-4 reportedly shifted toward the Mirage
3E as a result of the Export-Import Bank having delayed action on a loan appli-
cation until after Spain had already been forced to commit itself to buy 30
Mirage 3E's. . French salesmen quickly moved into the breach with the Mirage
offer when it became apparent to Spain that the Export- Import Bank was sitting
on its loan .77

Although the loan was ultimately approved, it was too late for the F-4 deal,
and only after repeated requests for a decision. The Bank's attitude toward
the loan was characterized by one observer as cavalier. An urgent request for
a decision when it would have reportedly resulted in the purchase of the F-4,
brought the response that the official handling it was on vacation. 78

3 . Danish Purchase of the Swedish Draken

The sale of the Sweden's Saab-Scania J- 35 Draken fighter to Denmark in 1968
followed a slightly different offset arrangement. In this deal, in which the
Draken won out over the Dassault Mirage 5 and the Northrop F-5 , the offset was
an external non-military government provided one. As Denmark had no aerospace
industry, the possibility of achieving an offset through partial production of
the Draken in Denmark was considered infeasible. Instead, Sweden undertook
the purchase of ships and food from Denmark, as well as technical and funding
assistance for a supersonic airport on Saltholm island located between the two
nations. 79 The French offset offer in the same competition was reportedly one
involving the purchase of pre-fabri cated housing units from the Danes. 80

Chapter 11

These offset terms offered by the Swedish Government reportedly played an
important role in the selection of the Draken.^l

4 . The British Exocet (MM- 38) Buy

In the late 60 ' s Britain found itself without an anti-ship missile, at a time
when many other navies were hurriedly arming themselves with such a weapon.

In approaching France for a possible purchase of the Exocet, Britain expressed
an interest in participating in some part of the production of the missile as
well as some external offset. France agreed to a work sharing agreement and
BAC was selected by the British government to be the British partner of Aero-
spatiale's missile division and Thompson-CSF , the developers of the missile. 82
Several other British firms are also involved in the production of sub-
assemblies of the missile. As a governmental external offset, France bought
the Rolls Royce Olympus gas turbine engine. 83

In addition, U.S. industry was involved with the Exocet in varying capacities.
Sperry was selected by Aerospatiale as subcontractor for the missile's coordi-
nate calculator. The Sperry calculator was embodied in some 80% of the missile
systems sold as of 1976, as part of the missile's fire control system. Thompson-
CSF as well makes a fire control system for Exocet which also includes a
calculator. This one has been bought by some nations in lieu of the standard
Exocet fire control system. 84

Another U.S. firm involved in the project was the Boeing Aerospace Company,
which obtained the U.S. Exocet license in 1971, as part of an effort to bring

Chapter 11

Jksgm

*4 .

-9*7?

for

sea- power

exocet

mm 38

aerospatiale

division engins taetiques

2, rue Beranger - Chatillon 92320 FRANCE

rOSft Q\\

*rospaY«i»
firospatiok
*osp atict

’^sp er//>

15 countries today have made
the choice of an incomparable weapon -
EXOCET - the missile which evades all
enemy defences.

Its autonomy and sea-skimming flight make
it virtually invulnerable. The range, speed,
accuracy and hitting power of EXOCET
weapon systems provide tactical
superiority to those navies which adopt
them.

In production or under development are:

□ MM 38 already operational in 9 navies
and which is suitable for all types of surface
vessels from patrol-boat to cruiser,

□ AM 39 fired from helicopters and
assault or maritime patrol aircraft,

□ MM 40 with a range of more than
35 nautical miles for over-the-horizon
engagement of surface targets,

capable of being fitted in quadruple mounts
in the smallest types of naval craft.

MM 38 and 40 can also be installed on shore
as fixed or mobile coastal batteries.

NATO S FIFTEEN NATIONS.

France into the NATO PHM project. Though Boeing was unsuccessful in selling
the Exocet to the USN as an alternative for its Harpoon or getting the French
Navy to join the NATO PHM project, the working relationship established did
eventually lead to Boeing, teamed with Hughes, successfully selling the Aero-
spatiale/MBB Roland II to the U.S. Army several years later.

Chapter 11

0. U.S. OFFSETS FOR EUROPEAN PURCHASES: 1975-79

1. The Swiss F-5E

After years of evaluation, the Swiss Government proposed in late August 1975
that Northrop be awarded an order valued at $486 million for 72 F-5E fighters.

As a compromise between the undesirable extremes represented by the very costly
prior Swiss licensed production of the Mirage III, or no work at all for the
hard-pressed Swiss aerospace industry, a limited assembly program was chosen.

The Swiss F-5's were assembled at the Swiss Federal Aircraft Factory at Emmen
(Mode #1 of industrial collaboration). Delivery of the 72 aircraft took place
between 1979 and 1981. In addition, the U.S. Government pledged its best
efforts to make Northrop deliver on an agreement to offset purchases.

Cost overruns on the Mirage III built under license in the 1960!s, had caused
a major political upheaval in Switzerland. Cost per airplane soared from the
original estimate of $1.84 million to $5.06 million, mostly owing to design
changes ordered by the Swiss (e.g. , there were interoperability problems between
the British Ferranti radar and the standard avionics). The first major blow
to the Swiss industry resulting from this backlash came when a Swiss government
decision to purchase close support fighter-bombers off-the-shelf from an outside
source was announced in June, 1970. Rather than pay the estimated 30% higher
cost of producing the aircraft, the LTV A-7G Corsair fighter bomber, or even
some parts of it, under license, direct purchase was opted for. At the time
it was expected that this decision would force the eventual closing of the
government-owned Federal Aircraft factory at Emmen. 85

Chapter 11

FOXC/Disk 49/Ch. 11/Pg 46-75

Start der J-2302 zu einem Testflug. Unter dem Flugel zwei AIM-9 Sidewinder

Dieses Bild zeigt
den Canard-Ver-
suchstrager Mi-
rage IliS (J-2302)
wahrend eines
Testflugs ir-
gendwo uber der
Schweiz. Gut er-
kennbar die bei-
den Canards, die
das Langsamflug-
verhalten der Ma-
schine erheblich
verbessern.

Though the Emmen facility wasn't subsequently closed down due to successful
diversification into space technology and civil aviation, for the F-5E Tiger
II program in 1975, a middle course between a full fledged license production
program (a la Mirage III) and off-the-shelf procurement (a la A-7) was
selected. This involved final assembly only of sub-assemblies and components
built in the USA and flown to Emmen.

The Swiss contractors had previously been given an opportunity to compete for
subcontracts on the aircraft program and were not competitive due to learning
curve, low quantity requirements, and the high cost of extra transportation,
packaging, etc. The consequent foreign exchange/job loss would be offset pri-
marily through an external bilateral offset program (Mode #6 of industrial
collaboration) .

To nail down the contract in Switzerland for the 72 F-5's, Northrop made a
unique commitment. In effect, it agreed to become a global sales agent for
Swiss industrial products, ranging from machine tools to water purifiers. The
company promised to find new business for Swiss manufacturers amounting to at
least 30% -$136 million— of the fighters' cost over an eight-year period. Most
of the Swiss companies that needed help were relatively small and lacked
international experience outside of Europe. 86

Consequently, Northrop set about establishing a special office in Switzerland,
inventoried 800 Swiss companies and established a computerized library of

FOXC/Disk 49/Ch. 11/Pg 46-75

Chapter 11

The MIRAGE IIIS- here on trial take-off with starting rockets - was
produced in Switzerland in license and serves as interceptor.

exportable Swiss products at Northrop headquarters in California. Northrop
representatives all over the world were told to be alert to markets for the
Swiss products. As part of this effort, Northrop was later able to help Swiss
companies sell elevators to Egypt, precision drills to Spain, ^7 shelving to
Saudi Arabia, and hoses to Mexico.

Therefore, for Northrop, the Swiss Offset program is primarily a marketing
effort.

General Electric, the manufacturer of the F-5's J79 engine also participated
in the offset deal. Because of General Electric's size and the scope of its
product line, however, they accomplished their portion of it through their own
purchasing agents. This has involved the purchase of, among other things,
precision machinery.

As a backup, the Swiss government insisted that the U.S. provide a guarantee.
Consequently Swiss-Northrop Offset program involved a Memorandum of
Understanding signed in July, 1975 between the U.S. and Swiss governments.

This MOU obligated a reluctant U.S. government to exert its "best efforts" to
induce its participating contractors to buy or market Swiss goods internally
or with third parties, to a minimum of 30% of the costs of the Swiss procured
program over an eight year period. In the view of the DoD the principal
responsibility for implementation of the MOU rests with the industrial
beneficiaries - Northrop and General Electric.

FOXC/Disk 49/Ch. 11/Pg 46-75

Chapter 11

A FAMILY OF FIGHTERS

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Inasmuch as offsets transcend the normal contracting management parameters of
the SPO, they impose responsibilities beyond the possible control of the SPO.
The Swiss offset is therefore being managed by a DOD/USAF team.

This MOU had been entered into after the contract for the Swiss Co-Production
program was negotiated. Although the U.S. Government stated that it entered
into the program under the belief that the cost of implementation was to be
borne solely by these same beneficiaries, the contractors did not originally
concur.

An April 1978 article in Fortune by Louis Kraar described the Swiss offset
program as.

"one of the most ambitious of such arrangements. Though other aero-
space corporations have agreed to buy products from customers, they
have never promoted them around the world. But the meticulous Swiss
persuaded the Pentagon, which must approve major military exports,
to pledge its 'best efforts' to make Northrop deliver the promised
marketing assistance. The company is fully aware that its credibility
is at stake in its unusual sales campaign for the Swiss."

"George Reed, Northrop 's offset-program manager, has picked up the
know-how of a trading company, he says, 'sometimes painfully.' Dis-
covering 'no reasonable catalogue' that fully represented Swiss
industry, he had to compile and distribute a directory listing 800
companies. After fruitlessly dealing by mail and telex with would-be
Swiss exporters, Reed opened a Zurich office. 'Since there's little
that anyone can show Nestle and Sulzer Brothers about selling abroad,'
he says, 'we end up working with firms that have limited marketing
experience."®®

Taking the most direct route first, Northrop bought Swiss electric cable, office
equipment, and even paper clips. Every division of the corporation, in fact.

FOXC/Disk 49/Ch. 11/Pg 46-75

Chapter 11

has a yearly dollar target for buying from Switzerland. Reed also placed a
$294 order for small versions of the famous Swiss Army knives* which he hands
out to promote the offset program. In the U.S., the steady rise of the Swiss
franc against the U.S. dollar has made it more difficult for Swiss manufacturers
to be competitive during most of the late 70' s, a requirement of the offset
deal .89

Although the Swiss F-5E deal was obviously by no means the first offset deal,
it was unprecedented in at least one respect. Northrop pioneered the marketing
of a full range of customer country's products to third countries in return
for armament sales.

Between 1975 and 1980 Northrop was successful in helping 200 Swiss companies
find markets for $209 million worth of products, mostly outside the United
States. 9°

On July 1, 1981, Northrop won another Swiss order for 38 more F-5s, thereby
bringing the total Swiss order to 100 aircraft.

2. Belgian MAG-58 Armor Machine Gun

In the spring of 1976 the U.S. Army selected the Belgian MAG-58 to replace the
current U.S. 7.62 mm armour machine gun for future employment in the M-l tank
turret and other armored vehicles. The U.S. Army awarded a two-year contract
to Fabrique Nationale (FN) of Belgium for 10,000 MAG-58 (designated M240 by

Chapter 11

FOXC/Disk 49/Ch. 11/Pg 46-75

the U.S. Army) machine guns and the Technical Data Package for $55. 5 million.

The first 300 weapons were delivered to the U.S. Army in December, 1977.

Maremont Corp. , the Army's previous sole supplier was expected at that time to
win the order for follow-on-production of approximately 16,000 MAG-58 machine
guns (which would be produced under license), the U.S. Army having planned to
issue the requests for proposals in 1978. However, Pabrique Nationale was
again selected in September 1979 over Maremont. Pabrique Nationale had since
begun to set up a U.S. subsidiary in Columbia, South Carolina, Pabrique
Nationale Manufacturing, Inc., where this follow-on order was to be ultimately
produced (a variation of Mode #4). 91 The second award to FN involved a five-
year $62,256,161 buy.92

The direct purchase in quantity from Belgium, to be followed -by possible
licensed production in the U.S., was also entangled in a larger issue. This
selection of the Belgium weapon was commonly understood to be intimately associ-
ated with the selection by Belgium of the F-16 over the French Mirage F-l the
previous year. Though not explicitly linked as such by the U.S. government,
this was viewed by the Belgians and many American observers as an external
U.S. government provided offset thrown in as a last minute sweetner to over-
come Belgian resistance to a U.S. buy during the competition, one in which
Belgium was the last hold out (per usual) in the four nation consortium selecting
a common fighter.99 The court action that was initiated by Maremont Corp.,
the loser of the competition, following the selection of the Belgian gun, dis-
played the ambiguity of operating within a highly structured and protected
national defense contracting environment that places a premium (at least

FOXC/Disk 49/Ch. 11/Pg 46-75

Chapter 11

theoretically) on competitiveness in the selection of a given system, while
simultaneously having to wheel and deal at the Alliance level in finding
politically acceptable, yet cost-effective trade-offs in line with considering
the more diffuse benefits of NATO Standardization.

The Maremont Corp. of Chicago, whose machine gun production facilities are
located in Saco, Maine (where some 600 jobs were at stake), plus all four
Congressional delegates from Maine, unsuccessfully tried to block the procure-
ment, but were only successful in temporarily holding it up. Maremont Corp.
and the Maine Congressional delegation filed suit in Federal District Court in
late May, 1976, to seek an injunction against American purchase of the foreign
arms. They succeeded in obtaining a court injunction in early July contingent
upon the findings of the GAO. Maremont had contended that the Army had vio-
lated the Buy American Act and federal procurement bidding procedures. They
also claimed that the Army had violated the specialty metals clause of Section
723 of the 1976 DoD Appropriations Act, and claimed that the Army had promised
Belgium the gun contract in exchange for the Belgium purchase of the F-16.
Maremont, the sole American bidder, bid its contract at $37,260,800, compared
to the $55,466,000 winning bid of FN.94

Although the U.S. gun had rated higher in service-life tests and lower in esti-
mated costs, the Pentagon said the Belgian entry excelled in reliability and
operational effectiveness. 95 The Pentagon further denied any connection between
the F-16 agreement and the Belgian MAG-58 deal. 96

In the end, the GAO upheld the Army's selection.

Chapter 11

FOXC/Disk 49/Ch. 11/Pg 46-75

3. The German 120 mm Smoothbore Gun for the XM-1

In late January, 1978, the U.S. Army decided to adapt the FRG's 120 mm smooth
bore gun for its new Chrysler M-l main battle tank— selecting it over the
British 120 mm gun. The gun is to be produced in the U.S. under license (Mode
#4). This decision was significant in that it bore on two very important U.S.
NATO related programs both involving the "two-way street" issue. These are
the M-l and the NATO AWACS programs.

As it related to the aborted 1974-1976 attempt to consider the Leopard II as
an alternative to the M-l as the next generation U.S. main battle tank, the
gun represented an attempt at salvaging the prior effort in some measure. It
also represented a possibly significant and much more feasible alternative to
standardization at the system level, i . e . , standardization (or at least inter-
changeability) at the level of critical subsystems or components.

With regards to the NATO AWACS program, the FRG was expected to be funding
around 60% of Europe's half in the program. Consequently, as with the British
F-111K order, the FRG was demanding some significant external offset of a
high technology nature, before agreeing to fund its share in the 18 aircraft
procurement.

Though the quid pro quo could not be an explicit one, some significant U.S.
gesture was called for. The offsetting acquisition had to be an external one

FOXC/Disk 49/Ch. 11/Pg 46-75

Chapter 11

due to the difficulty of introducing an internal offset at a late stage into
such a high technology program involving a small quantity of systems.

Though the possibl ity of such a gesture involving the tank gun, or the German
Gepard Flakpanzer, had been in the air for some months, the first the Germans
knew of a decision was on January 20, 1978, when Secretary of Defense, Harold
Brown, telephoned his German counterpart, Georg Leber, requesting an urgent
meeting. An American delegation headed up by the Assistant Secretary of the
Army arrived in Bonn, the next day. Negotiations with the Bonn Government and
the gun's manufacturer, Rheinmetall, continued through the weekend. The
negotiations concerned the details of transferring the technology and or
licensing arrangements necessary for production of the gun in the U.S. The
Army announced its decision on January 31. 9?

Opinion within the U.S. Army and Congress was split over the issue. Some
within the Army would have prefereed to stay with its present British-designed
105 mm gun, even though trials the prior December showed clearly that the
German gun had greater hitting power. In Congress some members also favored
the 105 mm gun, and damned the decision to buy German as 'political'.

In any case there were very substantial reasons for opting for the 120 mm gun
at that time, as well as picking a German gun. Even though U.S. Army's
current gun was more than adequate at that time, it couldn't match the German
smooth bore gun in dealing with the future threat. 98

FOXC/Disk 49/Ch. 11/Pg 46-75

Chapter 11

In response to renewed concern over NATO Standardization and the "two-way street"
policy, the U.S. had offered in late 1974 to open its national tank development
program, the M-l, to the FRG's Leopard II tank, both of which had emerged from
the aborted U.S./FRG MBT-70 program (much as there had been a competition between
the two tanks emerging from the earlier aborted Franco-German tank program).

After a string of 'volte face' over the next two years, the runoff between the
M-l and the Leopard, which was to be followed by license production in the
U.S. (Mode #4) by FMC if the Leopard was the one selected, never took place.
Instead, the two governments agreed that certain Leopard components would be
evaluated along with those of Chrysler— the winner of the U.S. competition— so
as to identify those which might be made standard or interoperable for both
the M-l and the Leopard II. This opened up the possibility of a cross licensing
arrangement for critical subsystems. The efforts focused on a common track,
night vision devices, metric fasteners, diesel fuel, and the fire control system.
Moreover, the U.S. had agreed to modify its version for possible adoption of
the German or British 120mm gun, while the Germans had agreed to consider the
gas-turbine engine for its future Leopard's. Although, the selection of the
German 120mm gun improved the chances of an eventual selection of the American
turbine engine (which reportedly many German officers wanted anyway), a GAO
report of late 1977 was pessimistic on the chances of the qualification of any
further subsystems beyond these two. 99

In announcing its decision to adapt the German 120mm gun on January 31, 1978,

Army Secretary Clifford L. Alexander, Jr. told a Pentagon news conference that
the driving factor in selecting the German gun over the British 120mm gun was

Chapter 11

FOXC/Disk 49/Ch. 11/Pg 46-75

that it would advance the prospects for interoperability of the next generation
of tank guns within the North Atlantic Alliance, considering the larger German
tank force.^00 At least NATO's two largest armies would use the same gun and
ammunition - no minor point. Especially, if the Leopard II is adopted on as
wide a basis among the NATO forces as was the Leopard I (FRG, Italy, Belguim,
Netherlands, Denmark, Canada, and Norway) which seems highly probable.

The Army Secretary also said that the January negotiations with the Germans
were limited to the gun and not linked to any commitment by the Bonn Government
toward agreeing to fund its large share of NATO's purchase of the Airborne
Warning and Control System (AWACS) which it had held out on for several years. !°1
But the gun deal did improve the atmosphere for the Boeing E-3A AWACS purchase
since the Germans had previously made it clear that they were awaiting a sig-
nificant U.S. gesture in support of its verbal endorsements for the "two-way
street" concept. Attention having previously been focused on the U.S. Army's
Leopard II/XM-1 competition, in this regards, it was hoped that this gesture
would mollify German public opinion. Later that year the Bundestag's Budget
Committee finally approved funding of the German share of the NATO AWACS project.

U.S. development and test efforts on the 120mm smooth bore gun were not expected
to be resolved before late 1981. Design modifications as well would be required
to reduce the cost of producing the gun in the U.S. and to take advantage of
ammunition advances. With the completion of development work it was expected
that M-l production with the 120mm gun could be initiated in 1984, in time for
the out years of the 3300 tanks in the M-l $4.8 billion program. First deliver-

Chapter 11

FOXC/Disk 49/Ch. 11/Pg 46-75

ies of the M-l were expected during the 1979-1980 time frame. Though the pros-
pects were for the German gun being in only a minority of these 3300 tanks,
the Army says it will eventually need twice the number of tanks provided for
under the original program. 103

The German gun will be produced in the U.S. at the Watervliet, N.Y., Army
Aresnal, under license from Rheinmetall (Mode #4). Under terms of the licensing
agreement, Rheinmetall would receive royalties amounting to 3% of the cost of
producing the tube up to a maximum of $25 million for domestic production.

For export production, the amounts would be 5%, and $25 million.

In the wake of the Leopard/XM-1 competition, the tank gun had previously become
the center of considerable controversy and political maneuvering. The House
Armed Services investigations subcommittee chairman. Rep. Samuel Stratton, who
had been a vocal opponent of any accommodation with the Germans connected with
the tank or gun, stated in an October 1977 report that the gun "must be made
on the basis of merit, not political considerations. The subcommittee's
reaction was dampened somewhat by the fact that the German gun was to be produced
at Watervliet, located in Stratton's congressional district.

4. HELIP and Belguim

Raytheon was awarded the prel iminry HELIP contract in January, 1974, receiving
the final contract several months later, in May. Belgium retained an option
to purchase before February 1, 1974, but did not exercise it, thus being the

Chapter 11

FOXC/Disk 49/Ch. 11/Pg 46-75

Improved Hawk: ready to defend NATO airspace.

NATO Hawk (Basic) 1958-67 $670M Paris based Societe Europeenne de Teleguidage, Five National Belgium, France

SETEL, co-owned by five national prime Governments , FRG, Italy,

contractors: ACEC (Belgium); AEG (FRG); and the NHPLO1 Netherlands,

Philips (Netherlands); Selenia (Italy); and (& U.S.2)

Thomson (France)

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. 1

only NATO nation with the older Hawk system not to replace It with the
Improved Hawk (See Chapter 12 for the HELIP project history). Negotiations
over its participation were to drag on internationally as well as continuing
to be a major political issue domestically over the next five years. To cite
one example, in February, 1978, the Belgium Vice-Premier for Defense,
threatened to resign if his socialist coalition partners continued to oppose
the appropriation of $120 million dollars for the purchase of the Hawk, since
Belgium urgently needed these missiles to fulfill its NATO commitments. The
socialists, however, considered the economic and financial situation faced by
the nation precluded any such expense.

With Belgium's governmental crisis in the Autumn of 1978 over the issue of
Walloon and Flemish local autonomy, a pending decision on a Belgian purchase
was further delayed. NATO was continuing to face the prospect of a 60 km gap
in the Hawk belt across the FRG. (The same governmental crisis also held up
Belgium's approval for NATO's procurement 18 AWACS aircraft, for which Belgium
was to contribute 3.§%).1Q6

In late January 1979, the Belgian inter-ministerial committee finally voted to
acquire the Raytheon Improved Hawk. The purchase will be offset by an agreement
for 100% in economic benefits for Belgium. The cost of the program was around
$140 million.107

A key element of the purchase agreement was a U.S. DoD agreement to waive the
Buy American Act provisions on Belgian products in the high technology and

Chapter 11

FOXC/Disk 49/Ch, 11/Pg 46-75

civil industrial field, which had recently been proposed by Defense Secretary
Harold Brown in order to break the impasse over deployment of the Improved
Hawk surface-to-air system.

According to the 100% compensation agreement, the U.S. will allow 60-67% direct
Belgian participation in the program, with the Buy American Act exemption pick-
ing up most of the difference. In addition the German Government will also
compensate Belgian industry to reinforce the overall economic package.^® Italian
industry also helped out by surrendering its pro rata share of the follow-on
Hawk European Product Improvement Program in return for its share of the Belgian
add on to the HELIP program.

As the Belgians had previously found out with their selection of the F-16, the
last holdout in a cooperative procurement effort, gets a pretty good deal.

Will they apply this same lesson to their more recent tergiversations over
NATO AWACS funding?

5. Offsets Accompanying Purchase of the Boeing Vertol Chinook

The diversity of offset arrangements possible is well illustrated by those
accompanying the following three Chinook sales: the Canadian nine aircraft
buy in 1973, the British 33 aircraft buy in 1978 and the follow-on Spanish buy
for three more aircraft in 1980. The differences in the three arrangements is
in good part simply a function of the customer's leverage resulting from the
size of each buy, but other considerations also enter into the picture; such

Chapter 11

FOXC/Disk 49/Ch. 11/Pg 46-75

fpw -Iff? '<^e

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The Boeing Chinook.
Use it as the one
multipurpose
helicopter.

#, The Boeing Chinook has no equal as a
multiple mission helicopter. So you can take
advantage of the Chinook’s flexibility without
first acquiring a fleet of small helicopters. You
can utilize it to carry at least 44 troops, or 12
tons of cargo, internally. Or it can. lift up to 14
tons — - from artillery to transmission towers
— on the triple external hooks.

Fourteen nations of the free world rely on
the versatility and capacity of the Chinook for
fast-response, multilift missions. It means lo-
gistical support for the military commander, a
*** ' ’ “ \ nation builder for civil operations.

~ ^ And, because Chinooks are Boeing-built

and. backed by Boeing’s reputation, you’re

assured top quality and unmatched support.
The more missions you want to perform, the
more you need the Boeing Chinook. Contact
our Marketing Department for specifics. Tele-
phone (215) 522-3751. Telex 845-205.

fill

Tim Leading Edge
P.O. Box 16858
' Philadelphia, PA 19142 USA

V-A.

as existing industrial relationships, competitiveness, capabilities, and per-
ceived interest of the purchasing nation's aerospace industry.

a. Canada's CH-147 Offset

In April 1973, Boeing Vertol and Sikorsky responded to requests for proposals
from Canada's Department of Supply and Services (DSS) and the Department of
Industry, Trade and Commerce (DITC) for eight medium lift helicopters and support
equipment for the Canadian Armed Forces. Each U.S. firm provided dual proposals,
one for the aircraft buy and one for compensatory work. The CH-47 , to be desig-
nated the CH-147 in its Canadian variant, was selected over the CH-53 in July
1973. 109

The eight aircraft buy was through FMS channels and came to $23,820,489.

Delivery occurred between September 1974 and October 1975. After one of these
eight helicopters crashed in a post-delivery ferry flight, the DSS
contracted for a ninth Chinook but this time as a direct commercial sale, not
FMS. The ninth Chinook cost $5.4 million and was delivered in April 1978.

In early 1950, just months after signing the North Atlantic Treaty, the Canadian
government began a major reequipment program for its land forces which involved
a surplusing of its older British equipment of World War II vintage and an
adoption of newer equipment, primarily of U.S. origin. The surplused British
equipment was distributed to Canada's European allies under the guidance of
NATO's international staff, on a grant-aid basis.

Chapter 11

FOXC/Disk 49/Ch. 11/Pg 46-75

Source: Boeing Canadian CH-1 47 1

As the new era of cold war called upon the social democracies to form a military
alliance of sovereign nations, the members had to collectively summon up the
resources to arm themselves. No easy task for an open society while still in
a period of relative peace.

During the rapid build-up of the early 50' s, the European members of NATO,
with the exception of the U.K. received most of their equipment from the two
North American members of the Alliance. As the Europeans were still rebuild-
ing from the devastation of the war, their contribution at this time was pri-
marily in the area of manpower. Therefore, sharing in the production side of
the equation was not yet an issue, because the continental Europeans were not
carrying a major share of the initial cost of equipping their forces. It
was not until the late 1950's with full recovery from the war that the conti-
nental Europeans would assume the major share of the burden of defense pro-
curement, at which time they too began to play a larger role in production.

Canada, on the other hand, had been paying for its own new equipment almost
exclusively from domestic^0 or U.S. sources. m

This interest on the part of each national government in work sharing can be
likened to the scenario in the U.S. where one of the major duties of all
legislative representatives to the national government is to make sure that a
percentage of the benefits of defense dollars and the related jobs trickle
back down to their tax paying constituents back home. The addressing of such
concerns are a part of the diffuse process by which coalitions are created for

Chapter 11

FOXC/Disk 49/Ch. 11/Pg 46-75

the passage of any given defense appropriations bills. This distribution and
flow of the tax dollars to the folks back home involves not only the location
of military bases and the placement of prime contracts, but legislation pro-
moting a wide distribution of defense sub-contracts generally, and more spe-
cifically assuring that constituencies represented by depressed labor market
regions, small businesses, and minority owned business get their share of the
goodies. A bureaucracy and concommitant regulations naturally had to be set
up for surveillance and enforcement of these work distribution policies on an
on-going basis.

In much the same way Canadian parliamentarians designated the Department of
Industry, Trade and Commerce (DITC) to be their watchdog to assure that their
tax paying constituents would be getting back their share of expenditures.

This was the origin of the DITC's function of 'qualifying' foreign (almost
exclusively U.S.) defense contractors. The U.S. contractors ran the risk of
being 'disqualified' for doing business in Canada, unless they could demon-
strate a good offset history.

As with other U.S. defense contractors, when Canadian purchases built up dur-
ing the 1950' s, the DITC progressively pressured Piaseki/Vertol into placing
work in Canada. Consequently Piaseki began in the mid-50's to ensure that
their sub-contractor base was expanded to include firms north of the border.
Moreover a subsidiary was setup in Arnprior, Ontario. As part of this effort,
Piaseki, since renamed Vertol, began tracking its subcontracted work placed in
Canada in 1959 .112

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Chapter 11

I I

(/) </> <
CC z S

<09

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Q 5 O

BOEING VERTOL COMPANY

As of June 30, 1981 the total contract award to Canadian firms by the Vertol
Division of Boeing alone (acquired by Boeing in 1960), had come to
112,199,091. The Vertol Division continues to track its Canadian work separ-
ately and reports to the Canadian DITC and DSS annually. This is due to the
practice of DITC which considers the work placement figures for each division
of a firm, i.e., company wide figures are not considered for purposes of qual-
ification, only divisional. In March 1974 Boeing Vertol upgraded its on-going
Canadian supplier arrangement, ratifying it in the form of the Boeing Vertol
Company Long-Term Canadian Supplier Relationship Program.

As we will see with the much larger CP-140 and CF-18 programs later in this
chapter, Canada will apply stricter offset formulas for more visible programs
where expenditures begin to approach the one billion dollar bench-mark (CP-140
maritime patrol aircraft), or far surpass it (CF-18 fighter).

For the Chinook purchase the DITC asked for projections of work to be placed
in Canada over the 1973 to 1980 time frame. The Boeing Vertol proposal for
compensatory work estimated the value of contracts that would be placed with
Canadian firms if particular projected programs came through, and if Canadian
firms were competitive in price, delivery and quality. The proposal basically
affirmed that Boeing Vertol had been tapping Canadian suppliers for almost
twenty years and would continue to do so.

As it was, some of the projected Boeing Vertol programs such as HLH, UTTAS,
and the Rail Car never panned out, but various CH-46 Sea Knight and CH-47
Chinook improvement programs did better than expected.

Chapter 11

FOXC/Disk 49/Ch. 11/Pg 46-75

Projections of work to be placed, and work actually placed, were as follows
over the eight year period:

Projections

Actuals^4

1973

No Projection

$7,720,643

1974

$ 942,000

6,048,002

1975

3,782,000

5,476,811

1976

6,069,000

2,540,774

1977

8,032,000

3,074,982

1978

7,352,000

7,798,430

1979

4,460,000

5,585,190

1980

3,450,000

9,500,367

1981

No Projection

8,500,803

As the above figures indicate the mid 1976 to mid 1977 period was a particu-
larly bad year with the cancellation of the HLH program by the U.S. Congress.
Simultaneously the Rail Car program started to go sour. The worsening situa-
tion required Steve Tremper, Vice President Boeing of Canada, to send a letter
to the DITC amending the original projections. It stated that in light of
business losses that Vertol would not be able to meet its projections for the
next several years. Vertol work placed in Canada did pick up almost immedi-
ately, however. In any event Vertol never received a reponse to the letter or
heard anything more on the subject.

FOXC/Disk 49/Ch. 11/Pg 46-75

Chapter 11

The following are the most recent major programs at Boeing Vertol and Boeing
of Canada Limited, Arnprior Division, involving industrial participation by
Canadian vendors and Boeing of Canada Ltd.

CH-46E Program (USN) — Boeing Vertol developed, qualified and is manufactur-
ing kits for this program. The planned two hundred seventy-three (273)
modification kits have been ordered over the past several years. A Cana-
dian firm, SPAR, received $757,000 in orders for auxiliary gear boxes dur-
ing the July 1, 1980 to June 30, 1981 reporting year.

CH-46 Safety, Reliability, Maintainability SR&M Program (USN)— This is a
new USN program to extend the life of 368 CH-46 's until the mid 1990's.

This involves the redesign, test and production of new components for the
airframe, landing gear, electrical and hydraulic system. Menasco has
received an $80,000 initial order for soft tooling and parts for the
piston assembly for the new landing gear. SPAR Aerospace has received an
initial order of $544,000 for new gears for mix box transmissions.

CH-113-113A Fiberglass Blade Program— VICOM, a new Boeing Vertol supplier,
has received an $345,925 initial order for pitch housings for the fiber-
glass rotor blades for CH-113, CH-113A and the Swedish HKP-4's.^®

CH-47 Chinook Production Program— The Chinook continues in production with
over 800 Chinooks of all models built. MENASCO is the supplier of landing
gear for new helicopters and spares. They have received authorization to

Chapter 11

FOXC/Disk 49/Ch. 11/Pg 46-75

proceed at a value of approximately $2,611,000 for landing gears for this
reporting period. Boeing Vertol is producing Chinooks (Model 234) for the
civil market as well as for government customers.

CH-47D Modernization Program (USA)— Under a U.S. Army development contract,
three CH-47's which originally were delivered to the U.S. Army in Model A,

B and C configurations have been rebuilt and modernized into a common
CH-47D version. These three CH-47D prototypes have been flight tested and
field evaluated. Production contracts to begin modernizing 361 of the
earlier CH-47's to the D configuration have been received. Litton is
subcontracting the aft transmission housing tooling and castings to Haley
Industries in Canada. MENASCO has received initial orders for the refur-
bishment of CH-47D landing gears.

Boeing of Canada Limited - Fabrication Division— This modern plant in
Winnipeg manufactures fiberglass parts for Boeing Vertol' s helicopters as
well as parts for transport aircraft in Seattle. Boeing Vertol placed
$540,237 in orders during this reporting period.

Boeing of Canada Limited - Arnprior Division^— The Division acquired the
rights from Delco (General Motors) for production of helicopter rotor lag
dampers. Over 3,100 damper kits have been delivered primarily to the U.S.
Navy. Orders for a substantial additional quantity of damper kits are

FOXC/Disk 49/Ch. 11/Pg 46-75

Chapter 11

Source: Boeing RAF CH-47C-414

currently in process of being authorized by the U.S. Navy. Annual busi-
ness for damper kits and parts is approximately $400,000. These rotor lag
dampers are used by the U.S. Navy, Canada, Sweden and Columbia Helicop-
ters, a commercial operator in the United States. Since the life of these
several hundred helicopters has been extended into the 1990's, continuing
damper business is expected.

b. The British Offset

In January, 1978, the British Defense Ministry decided to go ahead with the
purchase of 30 Boeing Vertol HC MK1 CH-47C-414 Chinook medium lift helicopters
for the RAF. In October, 1978, this order was increased to 33 aircraft.

Deliveries to the RAF began in August, 1980, and are to continue through 1981.
This 33 aircraft order represented the largest export contract in the divi-
sion's history, worth a total of $242,250,000.

The initial British order of CH-47's, in 1977, was to have been for seven
Chinooks. This increased, however, to 30 following an increase in the British
defense budget as part of the UK's efforts to increase its support of its NATO
forces, as well as the cancellation or cutback of several other programs.

This order represented a major increase in the size of the medium lift heli-
copter force which will be operated by the RAF in support of the British Army
of the Rhine (BAOR).120

FOXC/Disk 49/Ch. 11/Pg 46-75

Chapter 11

The Chinook (the B model) had previously been selected by the British back in
1966 over the Sikorsky CH-53, but the 15 aircraft order had been cancelled.

The original plan had been for the British and Germans to make a joint buy of
either the Boeing Vertol CH-47 or the Sikorsky CH-53. This was to also involve
some sort of cooperative production arrangement. It being no easy task to
coordinate two national acquisition processes, the joint program collapsed
when the FRG delayed its final decision. The UK went ahead unilaterally for
several years with the planned Chinook buy before it was cancelled in 1970.

In the meantime, the German program also finally went ahead, but on firmer
footing, with its purchase of 133 CH-53 ' s (later reduced to 110) that
involved assembly by German industry and a limited degree of licensed produc-
tion, collectively amounting to some 50% of the total cost of the buy. (Mode
#1, treated in Chapter 6.)

Having learned well from its previous experience, i . e . , of the vulnerability
of a program involving no offset, Boeing Vertol offered, in December 1977, to
undertake the placing, or causing to be placed by its subcontractors, orders
for work with UK firms amounting to at least 20% of the total delivered price
of the aircraft. However, unlike the Canadian offset which simply involved
annual projections of an on-going flow of work passed to Canadian suppliers,
the British offset reflected a commitment to redirect work through a broaden-
ing of Boeing Vertol ' s supplier base outside of North America. These industry
provided internal and external offset orders were to be placed within a period
of ten years starting from February 1, 1978.

FOXC/Disk 49/Ch. 11/Pg 46-75

Chapter 11

(

First Commercial Chinook Fuselage Spliced

Fuselage splicing of the first Boeing 234 Commercial Chinook 44-passenger helicopter took
place at Boeing Vertol’s main facility recently. Boeing now holds seven orders and five
options for the Commercial Chinook, after negotiations between the company and Bristow
Helicopters for five options were terminated. First flight is planned for July.

An offset value of 30% was finally agreed to in January, 1978. This broke
down into a firm commitment of 25% amounting to $60,562,500 in work, and
another 5% involving best efforts towards the placing of $12,112,500 in work
with British industry for a total target value of $72,675,000. The 5% best
efforts portion of the offset was a last minute add-on to make up for the
collapse of the technology transfer portion of the offset, one involving the
composite rotary blades and Britain's Westland Helicopters.

As of December 19, 1980 the offset agreement had progressed smoothly with the
dollar value of tenders submitted to U.K. suppliers by Vertol and AVC0
Lycoming amounting to $82,100,974 and broken down as follows:

Firm purchase orders placed

Vertol

$21,114,359

Avco Lycoming

$ 5,923,982

Litton Precision

$ 41,520

$27,079,861

Tenders in process

Vertol

$14,523,200

Avco Lycoming

$10,658,666

$25,181,860

Non-successful tenders

Vertol

$10,327,463

Avco Lycoming

$19,511,790

$29,839,253

The components and materials purchased have been for incorporation into not
only the 33 RAF Chinooks, but recent Chinook orders from other customers as
well, including the U.S. Army, British Airways (for the commercial derivative)
and the Australian Air Force.

FOXC/Disk 49/Ch. 11/Pg 46-75

Chapter 11

As is often the case, the British avionics industry will also benefit from
government designated procurement (not considered an offset), related to the
British CH-47 purchase. Marconi Avionics was awarded an initial 1.5 million
pounds contract in early 1979 for advanced radio navigation and communica-
tions systems to outfit the Boeing Vertol CH-47' s. Among the most advanced of
their kind in the world according to a Marconi Avionics spokesman, the systems
are the ARC 340 VHF/FM Comms and Homing System, the AD120 VHF/AM Comms system,
the AD380 "push button" Automatic Direction Finder, the AD2770 TACAN naviga-
tion system, and the AD27733 Interface Unit, specially designed by Marconi

Avionics in conjunction with Boeing Vertol, to interface the TACAN with exist-
ing aircraft instrumentation. 121

As of the end of 1980, five British firms had received orders from Boeing
Vertol in excess of $1,000,000, collectively totaling $16.1 M:

British Hovercraft Corp Ltd. - for fuel pod assemblies, wave and flotation
tests for the US Army and commercial CH-47s, and spares (for production of
the fuel pods Boeing Vertol had to work with the U.S. Army to obtain
approval of shifting the sole source overseas and also the sending over of
U.S. government owned special tooling to Hovercraft on the Isle of
Wight) .

FPT Industries - for main and auxiliary fuel cells, fuel cell assemblies
for RAF and commercial CH-47s and spares;

Chapter 11

FOXC/Disk 49/Ch. 11/Pg 46-75

Source? Boeing British Airways Mod^l 234

LUCAS - Aerospace Ltd. - for generators, generator control units, trans-
formers, drive shafts for US Army, RAF, and commercial CH-47s, and spares;

Metallic Components Ltd. - for interiors for commercial version of CH-47,
and;

Westland Helicopters - for vertical and horizontal hinge pins for RAF, US
Army, and commercial CH-47s.

Boeing Vertol had placed orders with another 32 British firms for a total of
around $5 million ranging individually from several hundred dollars in value
up to around $700,000 and including such items as adapters, supports, connec-
tors, attitude indicators, paint and so forth.

In order for Vertol to ensure fulfillment of the terms agreed to in its con-
tract with the British, the proper organization had to be setup.

For this offset program a new office was created and given a special charter.
Mr. John Me Lean, who reported to Vertol 's Director of Materiel, became "Man-
ager Division Offset." Mr. Me Lean was given authority commensurate with the
task, by receiving a special charter to go to whomever was required in Vertol
to support fulfillment of the offset commitment. This authorized him to go
all the way to Vertol's president if need be.^2

FOXC/Disk 49/Ch. 11/Pg 46-75

Chapter 11

I " •

s ;yersa~ / -■'■ vances m reliability and dura*
ig. tB.eiob bility. Already, they’ve logged
over 50,000 blade hours without
removal for depot repair.

The new CH-46E Sea
Knight. Ready as the
Marines, because Boeing
delivers something special.

doubled payload '
sp;mpre.meo;: more

TJ&jg JUE&Mimfg? £'£?£?£'

Philadelphia, Pa. 19142

As of December 1982 (with a Spanish offset program having been added to his
functions in the interim), Mr. Me Lean figures that the offset segment of his
job took about 60% of his time. Mr. Me Lean's expanded functions include the
organizing of vendor survey's, e.g. , checking out the firms capabilities in
the areas of machining, manufacturing, quality control systems, financial
soundness and management); coordinating contacts by British and Spanish firms
with the appropriate in-house people, such as Materiel, Quality, Operations,
PMO, Contract Administration and Engineering; working with the appropriate
embassies in Washington, D.C., and New York and Philadelphia consulates on
customs, shipping and security problems; working with outside consultants in
London and Madrid; plus general public relations functions for the offset

program. 123

Mr. Me Lean reports to the British MOD bi-annual ly on the status of the pro-
gram. The December 1982 reports showed that the offset figure for purchase
orders placed by Boeing Vertol Materiel with over 50 British firms had come to
a total of $49 million. This puts the offset program well ahead of schedule.
Not only were those British firms receiving orders competitive in price and
quality, but the majority were also ahead of schedule. Mr. Me Lean feels that
over the long-term the program will have a multiplier effect, providing the
British aerospace industry another important entree to the U.S. market. "The
relationships established have placed British industry in a strong position to
compete for similar business in the future, both with Vertol and other divi-
sions of Boeing, plus elsewhere in the U.S. aerospace industry. "124

FOXC/Disk 49/Ch. 11/Pg 46-75

Chapter 11

Both Boeing Vertol and the British MOD have been very satisfied with progress

to date in implementation of the program.

c. The Spanish Offset

For the Spanish CH-47C order several years later, yet another sort of offset
arrangement was utilized. Following negotiations occurring over the first
four months of 1980, the Spanish government and Boeing Vertol signed a
$28,000,000 contract for three additional Chinooks, on November 14, 1980. The
aircraft were delivered in May and June 1982 and will bring the Spanish
Chinook force up to 12 (one of the earlier Chinooks had crashed).

The Chinook (Model 414) sale was accompanied by Boeing Vertol's agreeing to an
industrial compensation program wherein it would issue quotation requests over
the seven year period following signature of the contract for articles or
services in a quantity equivalent to 20% of contract price (5.6M) . Even
once this level is achieved, Boeing Vertol has agreed to continue issuing
requests until the contracted price attains the 20% level (5.6M) figure,
whichever is earlier. 126 Note that this objective concerns a certain value of
RFQs issued, not work actually placed. Mr. Mclean's office is also responsi-
ble for implementing this newer offset program as well, and has expanded its
working relationships accordingly to include the Spanish MOD, outside consult-
ants in Madrid, Spanish industrial associations, and the Spanish Embassy and
consulate.

FOXC/Disk 49/Ch. 11/Pg 46-75

Chapter 11

” •Jr- nv IP

■■■-••.

■ . - ’ -- -

Source: Boeing Spa, WSH-47C

While it is preferable that the industrial compensation relate to the aero-
space segment of Spanish Industry, it may also include other commodities such
as items and materials for the maintenance, repair and overhaul of Supplier's
plant and facilities. Additionally, it may include items or services solic-
ited by (1) Supplier, (2) its subcontractors, (3) others under license to them
and (4) their lower tier subcontractors and licensees.

Following a forecast of its future procurement requirements Boeing Vertol
agreed to conduct a survey within four months of the signature of the contract
to identify a list of potential Spanish aerospace industry sources. Within
seven months of the date of contract signature, the suppliers agreed to tour
the facilities of the candidate sources with a survey team while also review-
ing its procurement practices with potential sources. For future procurement
requirements, the U.S. contractor will thereafter solicit proposals from, in
addition to its regular sources, those Spanish firms that have been qualified.

Contracts are to be awarded to successful bidders on a standard competitive
basis. The Boeing Vertol commitment is an objective, not a contractual guar-
antee. However, there is a penalty for non-compliance of $50,000.

According to Vertol 1 s cognizant manager, Mr. John Mclean, one of the major
potential candidates for procurement from Spain explored during 1981 involved
machine tools. Boeing Vertol was interested in what Spanish industry had to
offer. However, concerns over company-wide software commonality ( i . e . , a lack

Chapter 11

FOXC/Disk 49/Ch. 11/Pg 46-75

of interchangeability) plus the maintenance impact of reliance on an undevel-
oped service network (i.e., greater down time), prevented this from ever
panning out. ^7

6. The Belgian-Ford Armored Vehicle Buy

In July, 1979, the Belgian government selected the FMC M113A1 armored person-
nel carrier and the FMC AIFV armored infantry fighting vehicle over competing
French equipment. This involved a buy of 525 M113Al's and 514 AIFV ' s for a
total contract value of 15.6 billion Belgian Francs ($520 million).

Unlike the much larger Italian Army M113 buy in 1962, the size of the Belgian
buy did not warrant a license production program. 128 instead FMC is providing
a 100% offset for the Belgian purchase. It was expected that the contracts
would be finalized by November but several problems, including the implementa-
tion the offset agreement, had apparently delayed signing of the definitive
contract. The 100% offset is broken down such that 70 percent of the total
compensation package would be in the form of direct (or internal) offset
orders placed in Belgian for work on the vehicles, with the remaining 30 per-
cent in indirect (or exernal) offset orders to Belgian industry. Moreover,
before the definitive contract was signed, three-quarters of the total offset
package was to be put under contract.

FOXC/Disk 49/Ch. 11/Pg 46-75

Chapter 11

E. THE DUTCH LEOPARD 2 ORDER (1979)

The Dutch government announced on March 2, 1979 that it had selected the
Leopard 2 of the FRG's Krauss-Maffei over the M-l of the U.S. Chrysler Corp.
These two tanks had resulted from the collapse in 1970 of the joint US-FRG
MBT-70 tank development program covered in Chapter 10 (Mode #5). The Leopard 2
will replace the Netherlands obsolete British Centurion and French AMX-13
tanks .

1 . The Competition

As of September 1978 the Krauss-Maffei had been offering to farm out work
equal to 80% of the price tag to Dutch firms in internal and external offsets,
while retaining assembly in the FRG.

Chrysler had been offering, back in September, to turn over 55% of the work on
a prospective M-l order to Dutch companies. Some of the controls were to be
made by Philips and the turrets and guns were to be manufactured by the
depressed Dutch shipbuilding industry. Truck-manufacturer DAF would have
assembled the M-l's. As one additional carrot, the U.S. government had been
dangling the maintenance contract for U.S. tanks with U.S. forces stationed in
Europe in front of Rotterdam Drydock Co., but this couldn't involve any
guarantees .

In September, 1978, a Dutch Economics Ministry official, William Melis had
been quoted as saying "You cannot say anyone has an advantage or disadvantage
at this point. What interests us is the best deal for Dutch industry ."129

Chapter 11

Leopard 2

Source

NATO's Fifteen Nations

At the time of the announcement of the decision in favor of the Leopard 2 in
March 1979, Dutch Defense Minister Willem Scholten said the Leopard 2 ' s 120-mm
gun was a better match for Warsaw Pact forces than the M-l's 105-mm cannon
(though by 1984 XM-1 production is expected to involve the replacement of the
existing gun with the German gun). Scholten also said that the German tank
offered greater possibilities for standardization within NATO's Northern Army
Group, and for logistical cooperation with German forces.

The Dutch decision was expected to affect those of other nations. Norway and
Denmark, for example plan to buy a total of 250 new generation tanks in the
near future. The Dutch sale was also to be the first foreign purchase of either
tank and was expected to give the winner a jump on the market for new-generation
tanks .

Krauss-Maffei was already the largest tank manufacturer in NATO, its Leopard I
having been adopted by the majority of NATO's armies, including the Netherlands,
over competing American, British, and French models.

And so the offset influenced selection of foreign weapon systems continues,
and along with it the ever increasing need of selling firms and their governments
to deal with this Mode of industrial collaboration.

2. The Offset Program

Under the Dutch-German agreement, the Netherlands will purchase 445 Leopards
for a total of $1.22 billion with up to 59% participation in production by

Chapter 11

Dutch industry. The remaining 41+%, up to the 100% total, will be covered by
additional industry provided external offsets.

Unlike the earlier Leopard I sale to The Netherlands, this sale involved no
German government provided offsets. The 100% offset included Krauss-Maffei 1 s
assuring the participation of Dutch industry in not just the Dutch but also
the German order for 1,800 Leopard 2 battle tanks. This participation in the
German procured tanks' production was in good part a function of the Dutch
order coming at an early stage of the production cycle. Industrial and techno-
logical benefits to Dutch industry and the resulting transfer of know-how are
expected to come from:

armor steel processing;
engine production;
transmission production;
electrical components;
electronic components;
optical components;
hydraulic and mechanical components;
ammunition production, and;
general and vehicle construction.

3. Krauss-Maffei 1 s Offset Philosophy and Expertise

Wolfgang Raether, Member of the Krauss-Maffei Board of Directors responded to
querying by the periodical , NATO's Fifteen Nations, shortly after the Dutch

Chapter 11

decision had been announced. To the interviewer's question: "Are you generally
offering a compensation package for exporting the tank?"

Raether responded:

"Of course, no country would negotiate such a contract without such
agreements. We have established a reputation for fulfilling our
contractual obligations with regard to compensation. We have our
own specialized staff which is experienced in this field. Without
the offer of co- production and/or compensation no order of such a
size would be real i zed. "130

In an earlier interview with NATO's Fifteen Nations, one that appeared in its
October-November 1978 issue, Cl aus-Detl ef Lehmann, Commercial Managing Director
of Krauss-Maffei ' s Ordnance Division commented on the general structuring of
such bi-lateral industrial offset arrangements as those accompanying the sales
of the Leopard 1 and 2. Krauss-Maffei stands out as easily the most experienced
of firms in this area.

For offset orders , the purchases in question need not technically
correspond to the weapon system to be purchased, they need not
even be related to defense products. Both forms of economical
compensation raise considerable problems for the supplying
industry. In the case of an offset agreement, the problems mainly
concern :

the time span in the course of which the supplying industry
has to fulfill its offset obligations;

the selection of goods the purchasing country will accept as
offset;

the compatibility of the customer country's industry; and,
the volume to be compensated.

It is in the interest of the purchaser to reach, if possible,

100% compensation for the foreign currency drain resulting from
the purchase. In addition, the government of the buying country
will possibly include only those products into the list of offset

Chapter 11

goods, whose export entails difficulties and, as a result, employ-
ment problems for the buying country. In the question of duration
and schedule of the offset agreement, the importing country will
probably stipulate a short time span in order to conduct a fast
flow-back of the foreign currency temporarily lost.

The maximum demands of one contracting party cannot, of course,
provide the basis for a realistic offset agreement. This requires
an analysis of the flow of goods between the buying country and
the producing country, which then serves as the basis for the
range of offset goods to be agreed upon. The range of offset
goods included should be as broad as possible and should also
contain products for which the buying country is already qualified
to export, thus proving its compatibility in this field. The
more the product range is limited, the longer must be the time
available for the arrangement of offset commissions, and the lower
will be the percentage in the total offset volume.

In working out the offset agreement, the so-called "long-term
effect" must also be considered. This phenomenon arises from the
fact that business relations resulting from an offset agreement,
which at first were regarded as a "forced" measure, in many cases
surpass in volume and time the provisions of the original agree-
ment. Since this effect comes to light only after an offset agree-
ment has been fulfilled, it is placed in question by the contractor
during negotiations, and often not taken into consideration. 131

Lehmann offered further incites as to the organizational prerequisi tes to
operating in this Mode, and the long-term significance of conducting business
in this manner.

While an offset contract is being fulfilled, the industrial company
under obligation must have available the various prerequisites
for personnel and organization. Experience has shown that for
the fulfillment of large-volume offset contracts a separate organiza-
tion must be established, mainly because conventional company
functions, such as sale and purchase, are not akin to procedures
in offset operations. The offset represents a very special field
of industrial activity. Personnel of a mechanical engineering
company must, for instance, look after the import of wooden products
or basic materials.

Sometimes, the opinion is voiced that such a compensation is
actually "medieval bartering." Besides the fact that this is not
correct, since the buying country pays in currency for the weapons
systems, the industrial suppliers must acknowledge the political
and economical considerations which in the framework of an offset

Chapter 11

agreement constitute compensation for the substantial foreign
currency transfer. Difficult as it may sometimes be, this must
be accepted by industry. In the future, it will be quite impossibl
to sell large-scale weapon systems to other industrial states
without accepting certain offset obligations.132

F. THE CANADIAN/LOCKHEED CP-140

1 . Introduction

The 18 CP-140 Aurora aircraft, delivered between May, 1980 and March, 1981,
are at the center of one of the larger and more complex offset arrangements
entered into by a U.S. firm;. one totaling almost $1 billion in work over an
18-year period for Canadian industry. The offset represents an amount roughly
equal to the total value of the 18 aircraft contract. The 18 CP-140's will
fill the Canadian requirement for a Long Range Patrol Aircraft (LRPA), replacing
26 Canadair Argus aircraft that have been handling Canada's maritime patrol
duties since the late 50's.133

The Canadian Forces/Lockheed CP-140 is a special derivative of the U.S. Navy/
Lockheed P-3C Orion designed to Canada's particular requirements, one that
incorporates avionics equipment from the newer USN/Lockheed S-3A Viking as
well as a number of Canadian firms.

The contract is a direct Canadian government - Lockheed one for which the Cana-
dian Forces has a detachment of approximately 130 persons assigned to Lockheed's
Burbank, California, facility involved in administering contract activity.

The contracting government agency, Canadian Dept, of Supply and Services, has
an additional 15 persons assigned to the program at Burbank.

The CP- 140 will perform a variety of patrol activities, including shipping and
fisheries surveillance along Canadian waters, subsurface defense and search

Chapter 11

Advancing ASW technology

When defense dollars
get squeezed,

you need a 7-way weapon system.

That’s the P-3C Orion,

the biggest 1% in the Navy’s budget.

Surveillance Convoy protection Antisurface warfare Mine laying

The Free World now faces a double threat to
freedom of the seas.

A potentially hostile blue-water fleet of awesome
power and diverse capabilities must be deterred
within the limits of a tight defense budget.

The P-3C Orion evens the odds. The P-3C is a
force multiplier— a weapon system of many missions,
with the built-in flexibility to help counter the growing
threat to freedom of the seas.

It handles surveillance and convoy protection;
mine laying and over-the-horizon targeting; antisur-
face warfare and antisubmarine warfare; command,
control, and communication.

And it does it all while taking only 1% of the U.S.
Navy's procurement budget.

The U.S. Navy has a huge task in assuring freedom
of the seas. The P-3C is its most flexible airborne
weapon system in achieving that end.

^ l^Lockheed P-3C Orion

Leadership in Technology

and rescue missions. Patrol of Canadian waters, Canada's coastline being one
of the lon.gest in the world, plus the monitoring of Canada's vast Arctic area,
forms an important part of the country's Defense effort. ^4

2 . The Competition

The competition for Canada's LRPA requirement involved initially, in addition
to the Lockheed entry, Boeing's ASW version of the 707, the McDonnell Douglas
ASW version of the DC-8, Britain's Hawker Siddeley Nimrod ASW aircraft (using
the Comet airframe), the Breguet Atlantic (developed and produced by a French
led consortium including German, Dutch, Belgian and Italian firms) and Canadair's
updated version of the Argus. The two finalists in 1973 were Lockheed and Boeing.

The Boeing system offered to Canada equal capability with fewer aircraft, but
at several hundred million more in initial procurement costs than the' Lockheed
aircraft. Though Lockheed had a natural advantage from the beginning due to
its historic domination of the U.S. and allied maritime patrol aircraft markets
with its P-2 Neptune, P-3 Orion, and S-3 Viking, the U.S. Navy was interested
in supporting the competition in the interests of driving the price down for
an allied government, as well as that of using it to promote the development
of a more advanced maritime patrol aircraft.

In an attempt to counter the ASW version of the 707 's handicap of greater
uncertainty and a considerably higher price, Boeing put together one of the
most extensive offset programs ever entered into by the company. In addition
to sub-contracting to Canadian firms work on the LRPA aircraft itself, the

Chapter 11

Boeing offer involved work on other existing Boeing programs, proposals for
participating in the restructuring of the Canadian aircraft industry, and the
identification of opportunities for Canada to participate in its upcoming new
commercial air transport programs.

The firm content/offset package plus highly probable follow-on totaled $570
million which was equal to 70% of 25 airplane LRPA program dollars. More than
2,000 direct jobs per year were to be created through the 1970 ' s totalling
nearly 16,000 man/years of employment.

CANADIAN INVOLVEMENT

25 AIRPLANE BASELINE

21 AIRPLANE RECOMMENDATION

Firm & Probable

70%

82%

Firm, Probable & Possible

120%

140%

The three major elements of the Boeing Industrial Benefits Proposal were:
a. Series of three alternative actions, categorized by Boeing as "industry
assistance," worth up to $5 million.

Long-standing offer to assume minority equity position in
restructured Canadian Aerospace Industry.

Comprehensive two-phase management assistance/consulting program:
Phase I: Prior to LRPA contract award, in-depth survey of Canadian
deHaviland by Boeing management team on a fee basis, (fee estimate
$150,000).

Phase II: Subsquent to LPRA Award, continued management assistance
based on recommendations of earlier survey, principally oriented to
the Canadair portion of restructured industry. Repayment would be
on a contract-fee basis. (Equity in lieu of cash payment would be

Chapter 11

considered. )

Boeing would expand its support of the DHC-7 program on a contract
fee basis with option of equity in lieu of cash,
b. Canadian Subcontract Work From Boeing and Boeing Vendors:

LRPA Content

Direct Canadian Participation

Subcontracts & Offsets from

MILLION

U.S. LRPA Suppliers

Canadian Content in

MILLION

18-707 Aircraft

MILLION

Total

139

MILLION

Existing Contracts, Follow-On, and Vendor Pledges

Existing Subcontracts

MILLION

Follow-on To Above

MILLION

Vendor Pledges

MILLION

Total

MILLION

c. New subcontract bidding opportunities - Expected Business:

With Potential of S800 Million.

S165

Mi 1 1 ion.

Chapter 11

NEW PROGRAM POSSIBILITIES

NEW BIDDING OPPORTUNITIES - EXISTING PROGRAMS

7X7

YC-14

Roland Missile
Commercial Derivatives

Minuteman

Hydrofoils

SRAM

Airborne Command Post
Electronics

Other Goods & Services

Lockheed found itself having to meet this Boeing offset package with one of
its own that was comparable in scope. In the end, Canada opted for an
advanced version of an existing U.S. system with all the advantages of lower
price, less risk and greater commonality with systems currently in the U.S.
inventory, i . e . , both the Orion and the Viking. 135 Though source selection
was completed in 1973 funding problems held up contract award for several more
years.

3. The Structure of the Lockheed Offset Package

The offset of $937.6 million to which Lockheed finally agreed under terms of
the prime contract^ was structured in the following manner:

$414 million portion of the offset obligations are subject to penal-
ties for non-compliance

10% for the $213.2 million guaranteed for the period through

1981

5% for the $201 million guaranteed for the period 1982 to 1993;

Chapter 11

It's the P-3C Orion, and it offers a lot of advantages
both to people who must manage budgets and to
people who must cope with potential trouble.

To begin with budgets, the P-3C Orion takes less
than 1% of the U.S. Navy's fiscal '81 budget. Yet it
has been described as the Free World's premier
land-based maritime patrol aircraft. . .without
equal in its antisubmarine warfare and ocean sur-
veillance capabilities .. .essential to the operation
of CV battle groups.

Its mission flexibility is a key advantage in a
troubled world. It can be deployed rapidly to re-
mote areas. There its unmatched combination of
range and acoustic, infrared and electronic detec-

tion systems enables it to keep emerging situations
under a close surveillance impossible with any
other aircraft. And as more and more squadrons are
armed with Harpoon, more and more potential
troublemakers will think twice about the presence
of the P-3C.

The P-3C also brings trouble watchers the great
advantage of self-sufficiency. It operates effectively
from austere fields. And it has one of the Navy's
highest operational readiness records.

The P-3C Orion. From a viewpoint of both pro- £
curement and operations, it's unquestionably one

of America's biggest defense bargains.

Lockheed P-3C Orion

$168 million of work to be placed in Canada which is not subject to
penalties is based on 150 ship sets of CP 140/P-3C components;

$350 million of work for the 1981-95 period which involves
opportunities to bid on Lockheed subcontracts for new activities;

Lockheed also undertook to assist Canadair Ltd., and de Havi 1 and
Aircraft of Canada in marketing certain of their products throughout

the world. 137

The $414 million penalty portion involved obligations of both Lockheed and 30
of its suppliers. The $213.2 million with a 10% guarantee was spread between
them so that Lockheed guaranteed $94 million, and its suppliers $119 million.
For the $201 million with a 5% guarantee, the split was Lockheed $135 million,
and its suppliers $66 million. 138

The suppliers are obligated as a condition of their purchase agreements with
Lockheed to buy in Canada parts or equipment destined for this program or its
equivalents. Any parts purchased in the U. S. by Canadian suppliers on the
program are not included in the offset arrangement . 139

In one case, a CP-140 supplier is building a facility in Canada for the
program. The supplier, Sperry Rand Uni vac , which supplies the aircraft's
AYK-10 central digital computer is manufacturing in Winnipeg digital magnetic

Chapter 11

tape units. These store and load software program data for the central

computer. 140

In another case, the Guidance and Control Systems Div. of Litton Industries
will provide the twin LN-33 inertial navigators for each CP-140 from its plant
in Woodland Hills, Calif. Since small number of navigators involved in the
program did not justify the expense of shifting production to the company's
Litton Systems Canada Division in Toronto, Litton transferred other work to
the Canadian division at a value matching that of the inertial systems. 141

The $168 million associated with the manufacture of 150 P-3C structures includes
the 18 aircraft Canadian order as well as future P-3 sales. Should the actual
number exceed 150, the Canadians will be recipients of more than the promised
$168 million in structures business. If the number falls below 150, this offset
figure will not be met— to no financial disadvantage to Lockheed . 142

Since the $168 million portion of offset is a function of future P-3 sales
there is no penalty involved. There is also no penalty for failure to reach
the $350 million portion. The CP-140 U.S. suppliers are not involved in either
of these parts of the offset.

The five major Canadian firms involved are:

Canadair, Ltd., Montreal, Quebec which is handling the largest share
of production in Canada of CP-140/P-3 assemblies, including the outer

Chapter 11

and center wing box, aft fuselage, nose and aft radome, machined
parts, wing tips and search stores rack.

Enheat, Ltd., of Amherst, Nova Scotia, is building the rudder, weapon
bay doors and elevator.

Fleet Industries of Ft. Erie, Ontario, is producing the aircraft
flight station.

Bristol Aerospace of Winnipeg, Manitoba, assembled wing components,
and ;

IMP Aerospace, Ltd., Dartmouth, Nova Scotia has the contract for the
aircraft wire harness. 143

4. Transfer of Manufacturing North of the Border

Lockheed described the manufacturing shift to Canada as "the largest major
tooling move in modern history." A total of 17,600 tools were transferred to
Canadian facilities and 350,000 parts for startup work were also shipped. To
support the move, Lockheed accelerated production of some parts and stockpiled
others in anticipation of 3-6-month lapses in production of some items. It
fabricated 13,000 small parts to be bagged and transported northward to facili-
tate a smooth production start at the new fabricating facilities. These steps
account for a $12-million boost in Lockheed inventories .144

The U.3. Navy acquiesced to the manufacture of P-3C parts in Canada provided
it does not have to pay more for parts made in Canada and so long as there is
no adverse impact on contractual schedules. Lockheed acknowledged it might
have to swallow some expenses corresponding to the difference in costs of parts

Chapter 11

Tactical

Compartment

Observer

Station

Galley

Dinette

Maintenance

3- Tactical Navigator

4- Navigator/ Communicator

5JS- Non- acoustic Sensor Operator

Flight

Station

Interior of the CP-140 has been modified substantially from the layout used in other derivatives of Lockheed's P-3 family. The tactical crew
compartment, located in the center cabin area, is grouped around the tactical navigator’s station to improve crew coordination during
mission activities. An upgraded galley is situated in the aft cabin, and a flushing toilet is located in the forward cabin.

made domestically and in Canada. The company says it absorbed $9.4 million in
added costs in 1977-78 with the transfer of manufacturing . 145 in the event of
mobilization in this country, Lockheed could bring the tooling back to the
U.S. if Canada for any reason could not meet the demands of U.S. Navy produc-
tion orders. 146

In the January 22, 1979, issue of Aviation Week & Space Technology, Ronald R.
Nash, deputy director of the procurement branch for the Canadian Department of
Supply and Services stated that: "There were the minor initial problems that
can be expected when tooling and parts are shipped to set up new assembly
facilities, but there have not been any delays in aircraft deliveries caused
by the Canadian participation in the P-3 production ."147

5. The CP-140 Aurora's Mission Avionics

The Aurora payload is substantially different from the avionics normally carried
on the P-3C because of the peculiar Canadian mission requi rements . New ground
support equipment is also required.

A significant portion of the aircraft's avionics comes from a later aircraft,
the Lockheed S-3A:

Univac AYK-10 central processor;

Texas Instruments APS- 116 forward looking radar (FLIR) and forward
infrared sensor;

IBM ALR-47 receiving system utilizing wing-tip antennas;

Cubic Corp. sonobuoy reference system, and;

Chapter 11

s^iff^fe

f" ?

’$&.

■ " '• • :

■ "/„* ■ ■■•■ :■:■- ■ - : i--; •'.

-V >< '

Lockheed/Canadian Forces CP-140 passes near a tanker ship target during a simulated maritime mission off the California/Mexican coastline.
Outboard engines are shut down to conserve fuel during flight at the lower altitudes.

Sander Associates OL-82 acoustic data processor.

The CP-140 will have a significant percentage of Canadian-built avionics, mostly
accomplished by Canadian companies directly under subcontract to Lockheed. •

This largely represents new equipment. Canadian avionics equipment includes a
magnetic anomaly detector and auto compensation equipment, made by CAE Indus-
tries, Ltd., Montreal, a day or night reconnaissance camera made by Canadian
Zeiss, a Canadian Marconi Doppler navigator plus various communications, identifi-
cation and other navigation aids. 148

Other CP-140 equipment was procured directly by the Canadian Department of
Supply and Services from Canadian suppliers. Chief among these was CAE of
Montreal which supplied the Canadian Armed Forces with the flight and operational
mission simulator for the CP-140. This in turn was to lead to additional
sales of CAE simulators to another recent foreign customer of the P-3C, the
Netherlands (who also procured their P-3C's under a Mode #6 offset arrange-
ment, see Chapter 5). 149

6 . Lockheed's Perspective

Despite the burden of heavy offsets, Lockheed views the CP-140 program as an
important one in that it has resulted in improvements that make this version
of the P-3 a better aircraft, enhancing Lockheed's competitive position in the
domestic and overseas land-based anti-submarine warfare aircraft markets.
Furthermore, during the interval from 1976 to 1984, it will keep engineers and
other skilled personnel in place and contribute to maintaining the P-3 line.

Chapter 11

The program will be responsible for 7.7 million man-hours of P-3 production
work here at Burbank and 3 million in Canada. Without the CP-140, the man-
hour figure during these years here would total 12.6 million on the P-3 program.
Hence, the program is responsible for a 60% increase in local P-3 work. 150

Lockheed believed the high percentage offset arrangement of the type developed
for the CP-140 will be a pattern-setter for any future Canadian programs, such
as the later fighter procurement, but not for other international programs
where the offset percentages are usually considerably lower (30% being a very
common figure).

Chapter 11

6. The Canadian New Fighter Aircraft (NFA)

Competition

1 . The Military Requirement

In mid-1977 contenders from the U.S. and Western Europe lined up for the
Canadian New Fighter Aircraft (NFA) competition. The winner(s) would receive
a $2.34 billion (Canadian dollars, August 1977) order for between 130 and 150
aircraft (a total that was to include spares, support, construction and
training costs).

The NFA would replace a total of 260 aircraft in the Canadian Forces:
McDonnell C F- 101 Voodoos, Lockheed CF-104 Starfi ghters , and Northrop CF-5s.

These three aircraft fulfilled two Canadian requirements collectively: that
of North American air defense involving a long-range interceptor in line with
its U.S. - Canada commitment; and that of tactical fighter for Central Europe
under its agreeement with the North Atlantic Treaty Organization. Over the
following three years of the competition, as selection deadlines repeatedly
slipped, a major issue was to be whether one economical aircraft could
adequately fulfill both of these requi rements . Given the budgetary
limitations, however, the Canadian government was known to favor a single
multi-purpose aircraft as the most cost effective choice from the beginning.
Ottawa, however was not to make a firm decision on this point up until its
November 1978 announcement of the "short list".

Chapter 11

The original contestants in the race included the Grumman F- 14 , the McDonnell
Douglas F- 1 5 , the General Dynamics F-16, the McDonnell Douglas F/A-18A, the
Northrop F-18L, the Panavia MRCA Tornado, and two Dassaul t-Breguet entries the
Mirage 2000, and the Mirage F-l.- The French dropped out almost immediately,
however.

2. Offset Requirements

In addition to price and the more purely military considerations, the Ottawa
government emphasized the importance of the commitment as to the amount and
type of the production work that would be returned to Canada before it committed
its dollars. The recently awarded (1976) Lockheed contract for 18 CP-140 Aurora
maritime partrol aircraft (a derivative of the P-3C Orion) was commonly felt
as having set a precedent, one in which close to 100% of the cost would be
offset with work in Canada. 151

For the NFA competition,

Ottawa imposed a requirement that contenders for the order specify
what offsetting investments they propose to make in Canada. Canada
asked each of the competitors specify the products or activities
that would be carried out by Canadian industry, the value of goods
purchased, the level of employment created and the technology
enhanced or developed in Canada. As if this weren't demanding
enough, the competitors had to contend with the decline of the
Canadian dollar and a hefty 12% sales tax. 152

In mid-1978, Canada's Minister of National Defense, Barney Danson, outlined at
the semi-annual meeting of the Air Industries Association of Canada in Ottawa

Chapter 11

a seven-point industrial strategy aimed at attracting the highest benefits for
the country's aerospace industry from the New Fighter Aircraft program.

The seven key elements to the government's approach were to be:
a combination of contract quantity and quality; v

a reinforcement of special skills already attained by the Canadian aerospace
i ndustry ;

development of new skills, technologies and products;
broadening of offset benefits beyond the defense production sector;
preference for long-term proposals over short spurts of production;
a regional distribution of offset benefits, and;

a balance between defense spending and development of Canadian industry

generally.153

3. Selection of the Two Finalists

In November 1978, the Canadian government announced its decision narrowing the
six remaining contenders to two, the General Dynamics F- 16 and the McDonnell
Douglas F/A-18A. The final decision was expected at this time to be sometime
the following spring, the government of Pierre Trudeau wanting the decision
out of the way before the national elections scheduled for July.

Following are exerpts of Canadian Defense Minister Barney Danson's statement
in the House of Commons on the selection of the F- 16 and F-18A as the finalists
in Canada's fighter competition. He details why they made the "short list"

Chapter 11

and compares their relative advantages in meeting the country's domestic and
NATO defense commitments.

Direction has now been given to the interdepartmental program office
to initiate discussions leading to the negotiations of draft contracts
with the two prime manufacturers remaining in competition. In addi-
tion to the very important question of aircraft capability, fleet
size, delivery schedule and optimum phasing of payments, emphasis
will be placed on negotiating the best mix of industrial benefits
for Canada. In these negotiations particular attention will be paid
to arrangements that could contribute to the growth of research and
development activity in Canada as well as high technology industry
which complements our geography and our resources. Emphasis also
will be given to ensuring that all regions of the country will have
full opportunity to participate in this program.

Our numerical requirement of between 130 and 150 aircraft is critical
to our capability to meet our domestic and European commitments. We
are indeed disappointed that procurement of sufficient numbers of
F-14s, F- 1 5s or Tornados could not be accommodated within our set
budget of $2.34 billion (August 1977 dollars).

Our evaluation also revealed that acquisition of a mixed fleet would
bring little or no benefit in terms of fleet size and that operation
of such a fleet would bring substantial liabilities including double
training and logistic support systems over the life span of the
ai rcraft .154

The two most severe constraints that we face and will continue to
face are the number of aircraft required and the set amount of money
to buy them. Our task, then, is to buy the best military aircraft
available within those constraints, while seeking the best possible
industrial benefits with a minimum of project risk.

In addition to cost and numbers, there are other considerations that
serve to favour the two aircraft we have kept in the process.

To begin with, there is the military and political assessment that
we have made of the current— and to a certain extent, anticipated—
strategic situation that we are facing.

A package combining F-14s and F- 16s would have helped Canada meet
its requirements for air defense of a large continent and its
responsibilities to NATO to provide air to ground capability.

We have come to the conclusion that an adequate number of the smaller
aircraft equipped with radar guided air-to-air missiles and suitably

Chapter 11

deployed across Canada, could afford us the capability to fully exer-
cise our sovereignty by intercepting, identifying, and if necessary,
destroying aircraft that might be probing into Canadian airspace.

Having this type of prudent capability, we believe, would deter probes
and offer adequate protection against the possibility of a bomber
attack on the North American continent.

Having eliminated the three most expensive systems from the competi-
tion, three remained— the CF-16, the CF-18A and the CF-18L— that met
or came very close to meeting our numerical requirements within the
budgetary envelope while being able to meet the most likely military
chal 1 enges .

The CF-18L proposed by Northrop could meet these most likely chal-
lenges and probably be acquired in sufficient numbers. Potentially,
it also provides a very attractive package of industrial benefits.
However, we have assessed as very considerable the risk of committing
Canada to buying a sophisticated aircraft that is not in service
with any other country. At this time, I consider all the various
types of risks which could be involved in the development and initial
introduction into operational service of this aircraft are greater
than we either need or should be prepared to accept. Moreover, even
in the best of circumstances, the delivery schedule of the CF-18L is
likely to be markedly behind that required for the timely replacement
of our C F- 101 and CF-104 aircraft.155

The F- 16 is a single-engine aircraft which has been selected by five
of our NATO allies including the United States. Should the CF-16 be
acquired, Canada would of course have extensive commonality with
NATO allies in Europe. While this aircraft does not have the degree
of sophistication of the larger aircraft, it does have acceptable
capability and is the only aircraft which at this point meets the
numbers required.

The other fighter remaining in the competition, the CF-18A, offers
us another set of possibilities. It may be more expensive than the
CF-16 would be, therefore we can expect to acquire fewer although I
am optimistic that an adequate number to meet our roles can be acquired
in negotiations. Purchase of this aircraft could allow for co-opera-
tive logistics arrangements with the United States.

On the other hand, being a twin-engined, somewhat large aircraft,
the CF-18A offers some definite advantages of its own. These include
a good potential for growth, or a capability to be fitted with new
systems that may be necessary to cater to future demands made of a
fighter aircraft. The CF-18A also currently has more advanced all-
weather capabilities in the context of sovereignty protection and
air defense.

Chapter 11

The F-18 Hornet —one of the
v latest things in the air. Our

Magnamite'5'' graphite fiber, which
makes up nearly ten percent of
the aircraft's structural weight,
plays a key role in the F-18’s out-
standing performance. Magnamite
fiber and prepreg are the primary
graphite materials used by
McDonnell Douglas, prime con-
tractor for the Hornet. Our 3501
epoxy resin system is also present.

Lightweight, high strength, and
stiffness are at work in the F-18's

wing skins, speed brakes, horizontal
and vertical stabilizer skins, and
such secondary structures as access
doors and fairings.

Our graphite fiber has many
other missions in aerospace. It's
aboard the Trident, Pershing II and
MX missiles. (We also developed
the composites for the rocket
motor cases of Minuteman, Polaris,
and Poseidon.)

In fact, we produced our
one-millionth pound of Magnamite
graphite fiber in January 1981. And

by 1984, we'll be making 2V2 million
pounds annually, with a large
majority of this capacity still com-
mitted to external sale.

When you need the best in
graphite fiber or high-performance
prepregs, COME HOME TO HERCULES.

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We expect that a reduction to two contenders will have a very favor-
able impact on Canadian industry's ability to participate with prime
manufacturers in the development of detailed industrial proposal s . 156

At the time of the announcement of the two finalists in November 1978 the
McDonnell Douglas F/A-18A Hornet offer for the fixed-price $2.34 billion order
stood at 127 aircraft, and the General Dynamics F-16 offer stood at 142 air-
craft, 157 i.e., a CF-18's unit cost would be some 12% more than that of a
CF-16, with quantities ordered adjusted accordingly.

Minor modifications to both ai rcraft would be required in order to meet Canadian
needs, including all-weather radar and Raytheon/General Dynamics AIM-7F Sparrow
missiles on the F-16, night identification lights, electronic countermeasures
and related avionics.

4. The Two Finalists' Offset Offers as of November 1978

Each contractor's offer faced a differing, but major shortcoming at this stage.
For General Dynamics it was the Canadian government's assessment that it needed
to significantly improve the quality of its offsets. For McDonnell Douglas
it was the more difficult task of increasing its offer of 127 F/A-18As by an
additional 13-23 aircraft.

As of November 1978 "short list" selection the two finalists each offered a
package with a value of approximately $2 billion in industrial offsets.

Principal elements in the McDonnell Dougl as/Northrop Hornet offset package
i ncl uded :

Chapter 11

Provision of 22,800 jobs in Canada by 1991-92; 8,400 jobs by 1983-84.

Canada would participate in parts manufacture, testing, tooling, subassem-
blies, final assembly, maintenance, test equipment and support of other
military aircraft manufactured by McDonnell Douglas.

Participation in solar energy farm technology.

Participation in microwave, vacuum grain drying technology.

Medical supply computer and software manufacture.

Guidance systems for the air-launched cruise missile (ALCM) and the General
Dynamics Tomahawk cruise missile. (Canadian officials were especially
interested in this offset, however creditabil ity to MACDAC was an open
issue) .

Payload assistance modules for the space shuttle.

Construction of liquid natural gas transport ships. (One Canadian official
doubted the country's shipyards were large enough to undertake such con-
struction . )

Ion vapor deposition technology (aluminum plating).

McDonnell Douglas had let $212 million in business in Canada as of Sept. 1 and
had aided Canadian firms in making contacts with U.S. industry . ^8

The General Dynamics offsets package included:

Provision of 19,000 jobs in Canada by 1991. Manufacture in Canada of
avionics, subsystems and engine components, plus final assembly of the
Canadian F-16's.

Chapter 11

Production in Canada of flight simulators, spare parts, support equipment
and technical publications for the Canadian F-16's and manufacture of
F- 16 components for additional nations.

Opportunities for Canadian industry to share in commercial and defense
programs of General Dynamics and subcontractors.

Transfer of technology involving digital avionics and advanced composite
materials used in surface areas of the F-16.

Participation in shipbuilding, such as liquid natural gas transport ships,
and new military aircraft.

Significant investment in Canada by General Dynamics, Pratt & Whitney and
Westinghouse to create new jobs and exports.

New venture activity, including a high-technology vacuum casting facility.
Assistance to Canadian companies in the international marketing of their
products .159

Earlier in 1978 there had been Industry speculation that the offset requirement
would pose a problem for General Dynamics because of its obligation to let
Belgium, Denmark, the Netherlands and Norway participate in third country sales.
The MOU with the four NATO nations calls for them to participate in 15% of
third country sales. General Dynamics however did not see the agreement with
the four NATO Nations as posing a particular problem. General Dynamics attitude
was one of, even with the 15% requirement, there would still be a lot of
participation left to offer Canada.160

100

Chapter 11

Ruggedized Raytheon airborne CRT’s
are seen in the toughest places.

■ Seen clearly in cockpits full of sunlight - in
more than 10,000 foot-candles of ambient light.
Because of Raytheon’s patented RAYVUE® filter.

■ Seen in the A-6, A-10, B-l,B-52,F-4, F-lll,
F-14, F-15, F-16, P3C and S3 A aircraft. Because of
Raytheon’s high-performance ruggedized CRT’s
and techniques for packaging
with yokes and shield.

■ Seen whenever vendor
responsibility and reliability
are needed most - when en-
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Competitive pressure for the NFA was acute, this being reflected in the content
of the two industrial teams offset offers. The significance of this competition
for the two finalists centered around two issues. For McDonnell Douglas it
would be the first export order for the F/A-18A, while for both contractors,
it was felt the sale would have a major impact on pending and future foreign
competitions .

Although McDonnell Douglas had orders for 1,377 F-18As from the U.S. Navy, it
had yet to receive a foreign contract for the plane. A Canadian order would
give it international standing. The General Dynamics F-16 on the other hand
had a total order base as of mid-1979 of 1,811 including 1,388 from the USAF,

348 from the collective Bel gian-Dutch-Norwegi an-Denmark order and 75 from Israel.

If Canada picked the F-16, the General Dynamics plane would have a commanding
position as the North Atlantic Treaty Organization's fighter. But if Canada
opted for the F-18A or another fighter, other countries might be inclined to
do likewise. The F-16 and F-18A were also among contenders for an Australian
contract for an initial 75 fighters and a Spanish order for 144.

5 . Selection is Postponed and Competitive Pressures Increase
As things turned out, the selection of the NFA was to be postponed for what
was to be another year from the scheduled date. Though the government of Prime
Minister Pierre Trudeau was planning to get the selection out of the way before
calling an election in the summer of 1979, his government collapsed and the
election occurred sooner than he had planned, one which his Liberals lost.

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Chapter 11

With the new conservative government of Joe Clark taking office on June 4,

1979, the competition took a new twist. Though the new government continued
contract negotiations with General Dynamics and McDonnell Douglas, it stated
that it wouldn't consider itself bound by the Trudeau government's two-plane
list.

The new Conservative government preceded to ask the U.S. whether Canada could
get cut-price terms on 78 USN/Grumrnan F- 14 fighters that had been sold to Iran
but which Iran wanted to sell back to the U.S. The F-14, as well as the F-15,
was highly rated by Canadian pilots but dropped from contention the previous
November because it was too costly. 161 The u.S. agreed to discuss the matter
with Iran but nothing ever came of it, and the competition continued as
previously with only the two-plane short list.

The new government pledged to make its choice by the end of the year. Joe
Clark's Progressive-Conservative government in turn collapsed, however, 1-day
before the decision was to be announced, and elections were called again, which
led to the Liberals being reinstated, after 9-months out of power, in February

1980.

Meanwhile with competitive pressure building, both the McDonnell Douglas and
General Dynamics offset offers had been increased, as well as being worked out
in greater detail .

6. McDonnell Douglas1 and General Dynamics* Offset Offers as of the Fall of

1979

Canada's Defense Minister, Allan McKinnon, said that as of the fall of 1979,
with the Conservative government's decision only weeks away, both the GD and

McDonnell Dougl as/Northrop offset proposals were "fairly close together. "162

As of November, 1979, McDonnell Douglas had increased its offer to $2.6 billion.
This total consisted of $700 million in internal offset work related to
F/A-18A and CF-18 work, plus another $1.9 billion in external offset work
ranging from aerospace-related programs to non-industry benefits, including
tourism promotion. This total of $2.6 billion in work would result in 24,000
over the 1980 ' s of which 8,000 would be aerospace related.

McDonnell Douglas proposed that it would provide the Canadians with 150
CF-18s , with deliveries starting in 1982, based on a go-ahead in 1979.

At the option of the Canadian government, the proposal offered final assembly
and test in Canada of the Canadian Hornets plus another 100 F/A-18s sold to
third countries, excepting those countries that would contract for coproduction
programs .163

Canadian CF-18 content would include the forward fuselage nose barrel, center
fuselage barrel , engine inlet nacelles and boundary layer control ducts and
forward fuselage side panels, while McDonnell Douglas' F/A-18 suppliers would

103

Chapter 11

provide packages related to the aircraft's engines, avionics and other equipment
and support.164

McDonnell Douglas had earlier proposed farming out approximate! y $500 million
in DC-9 and DC-10 work al ready being performed in its Canadian plant, but the
government ruled against counting that because the work had been started prior
to March 18, 1977, the deadline established in the new fighter aircraft program
for creditabil ity of new work.166

In the advanced technology area, McDonnell Douglas had been working with
numerous Canadian companies, leading them to acquire improved manufacturing
capability that would be applicable to future programs. This included the
manufacture of graphite epoxy components which would involve the use of such
advanced manufacturing technology as laser cutting tools, along with an offer
to assist prospects in Montreal and Ontario in setting up a manufacturing
facility containing a machining center having five-axis direct numerical
control . 166

This included the making available to Canadian firms of 27 licenses and tech-
nical assistance covering proprietary processes. These include a McDonnell
Douglas-developed advanced plating process, a system for high-volume economical
fabrication of sheet metal small pars, a cryogenic wind tunnel that makes
possible attainment of high Reynolds numbers with small models, cryogenic heat
pipe for anchoring pipelines above ground surfaces without disturbing critical
environmental temperatures , a cryogenic, heat-resistant muffler material

104

Chapter 11

developed as a fallout from space program work, technique for providing flush-
crown rivets in metal assemblies without shaving, a microwave vacuum system
that is applicable to drying agricultural products, technology related to
fastener manufacture and a guaranteed workload to support DC-9 and DC-10
production, and technology support in developing wind energy generating
devices. The company also offered to work with Canadian companies as a
partner in developing solar electric equipment and cryogenic insulation that
would be applicable to a liquid natural gas transport that is in the design

stage in Canada. 167

The McDonnell Douglas proposal also offered to establish an office with its
principal F- 18 partner, Northrop, in Canada to promote exports of all types of
Canadian products, utilizing the worldwide marketing contacts of the two firms

The value of the aerospace-related portions of General Electric's proposed
offset would be about $250 million, about half the total corporate G.E. offset
effort. Its total proposal included increased purchases in Canada by many
divisions, including industrial and consumer products operations . 168

As of November, 1979, G.E, had awarded an initial $2. 5-mill ion contract to
Bristol Aerospace, Ltd., for the Hornet's F404 engine exhaust frame assemblies
and a contract for more than $1 million to Walbar Machine Products of Canada
for F404 low-pressure nozzle assemblies, which have a potential value of $50
million. G.E. was still considering several other F404 components bids, as
well. These initial F404 contracts were firm regardless of whether the CF-18

105

Chapter 11

was chosen, though if the airplane was not selected by the Canadians, G.E.
would naturally reassess placement of follow-on contracts to these companies. 169

In addition, General Electric was considering the establishment of a $70-
mi 11 ion commercial and military turbine engine blade and vane manufacturing
facility in Canada that would employ 400 persons and develop more than $400
million in sales over a 15-year period. General Electric had been studying
the development of additional capacity in the U.S. With the advent of the
Canadian fighter program, it extended its site search to north of the border.^

Here we see Northrop' s offset formula previously used on the Swiss F-5E sale
in 1975, marketing to third countries was also applied as part of the CF-18
sale. Northrop was able to claim several years later that they were able to
quickly exceed their goal of helping Canada find markets for $30 million worth
of products.

As part of this sale, Northrop helped line up a customer in Liberia for a
Canadian maker of paper cups.

Company officials say the sale of the paper cups came as the result of a chance
meeting in Liberia between an alert Nigeria-based Northrop representati ve and
a businessman who expressed an interest in importing paper products . 172

106

Chapter 11

The new plant would be a General Electric Aircraft Engine Group and Canadian
General Electric joint venture, conditional upon the CF-18 being selected.

This new facility would be operational in 1983-1984.173

General Electric Aircraft Engine Group believed the Canadians were very inter-
ested in having the new fighter aircraft engine final assembly and test programs
in their country and would lean toward financing the nonrecurring setup costs,
including tooling and training. In November the company was in the process of
sending detailed requests for proposals concerning this work to CP Air, Orenda
Div. of Hawker Siddeley, Rolls-Royce (Canada) and Standard Aero. It estimated
the value of this work at approximately $10 million. 174

Other McDonnell Douglas suppliers that would provide Canadian offset work
included Cleveland Pneumatic (landing gear), National Water Lift (actuators),
Hughes Aircraft (radar data processor), Conrac Corp. (stores management, set
assembly and test and component production), Garrett AiResearch (environmental
control system and auxiliary power unit), Litton Systems, Ltd. (inertial naviga-
tion system and advanced test equi pment ) .175

There was also a plan to have IMP, Dartmouth, Nova Scotia, handle coproduction
of wire harness assemblies for the entire F/A-18 program, including the CF-18. 176

General Dynamics had been able to announce by October, 1979, that it had
chosen most of the Canadian companies it would team with if Canada chose the
F- 16 as its NFA. The decision was still expected by year-end. The GD proposal

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Chapter 11

included a total of $2.4 billion (Canadian) in offset work and was expected to
generate more than 20,000 Canadian jobs during the 1980's. $1.1 billion of

the total CF-16 industrial investment would go to the high technology aerospace
and electronics sectors of the Canadian economy. Its program included final
assembly and test in Canada of approximately 200 CF-16s, including 50 airplanes
for sale to third countries. As of October more than $75 million (Canadian)
in purchase orders had already been placed with Canadian firms. 17?

The program— descri bed by GD as "the product of the same team of corporations
which established the multi-billion dollar F- 16 multi-national coproduction
program" with four NATO nations— had four major elements:

Direct work in Canada. In addition to final assembly and test of the
aircraft and its Pratt & Whitney engines, this work also included assembly
and test of an additional 50 F-16s for sale to other countries. Also,
Canadian industry would supply U.S. companies with CF-16 avionics and
subsystems and other products, as well as support equipment and spares
for Canadian-manufactured systems and components.

Marketing assistance. GD said it will "establish a team of international
marketing specialists to expand international marketing of Canadian prod-
ucts and services."

Investments. This included "direct investment in Canada in industrial
and/or technical projects, joint ventures or businesses; establishment of
a new vacuum casting facility in Canada for the manufacture of turbine

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Chapter 11

engine components," and "transfer to Canada of a high technology el ectroni

product line."

Purchases. In this category, said GD , are: "procurement of goods and
services from Canadian sources of supply by General Dynamics Corp. and
its suppliers, including United Technologies Corp., prime contractor for
the CF-16's FIDO engine; industrial benefits generated by European firms
and governments involved in F- 16 coproduction; involvement of Canadian
i ndustry in General Dynamics1 advanced programs, including interchange of
advanced technology with Canadian industry," and "employment of Canadian
personnel and use of Canadian products in international projects ."1^8

General Dynamics characterized its plan as one that "emphasizes the development
of high technology aerospace and electronics capability within Canadian indus-
try, establishes resources to multiply sales of Canadian products in the world
market, commits substantial capital resources for the establishment of new
businesses and manufacturing facilities in Canada, and pledges General Dynamics
many of its divisions and its U.S. and European suppliers to expanded purchases
of Canadian goods and services ."179

With the fall of Prime Minister Joe Clark's minority government on December
13, 1979, Clark said that although his cabinet had been prepared to make the
fighter choice, he believed it no longer had the authority. Consequently the
decision on Canada's new fighter aircraft would be deferred until after nation-
wide elections were held February 15, 1980.

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Chapter 11

In the interim, McDonnell Douglas (MDC) proceeded to find itself embroiled in
two offset related disputes, one with its industrial partner Northrop and the
other with the Department of Defense.

7 . The McDonnell Douglas - Northrop Suit Over Their Teaming Agreement and
Canadian Work Distribution

Under a 1974 joint venture agreement Northrop licensed MDC to utilize Northrop
YF-17 technology for a carrier-suitable derivative, the F/A-18A, for sale to
the U.S. Navy and foreign countries. The YF-17 was Northrop' s entry in the
USAF Lightweight fighter prototype competition against th YF-16 of General
Dynami cs . GD's YF-16 was selected in January 1975. For its derivative of the
YF-17, MDC would act as prime contractor and follow a 60:40 split of prime
contractor work between itself and Northrop (as a rule of thumb, an aircraft
prime contractor obtains 55% to 60% of program funding). Northrop would act
as prime contractor with the work sharing ratio reversed for the land based
version, the F-18L. The version of the F- 18 being offered to Canada was
essentially similar to that of the USN's F-18.

On October 26, 1979 Northrop filed suit in a Federal Court in Los Angeles asking
for a preliminary injunction to prevent MDC from "further violations" of agree-
ments between the two companies, and to stop McDonnell Douglas from "unilateral!
offering to foreign countries" the opportunity to manufacture Northrop portions
of the F/A-18 strike fighter. Northrop charged that Douglas had proposed that
Canadian concerns perform "substantial portions of the work" that Northrop was

110

Chapter 11

Northrop^ prototype from which the F/A-18

mimM

phi ,

... -. .

■v ■::

When the U.S. Navy and Marine Corps needed a single versatile aircraft to
replace both the F-4 Phantom and the A-7 Corsair, they selected the multi-role
F/A48 Hornet

The F/A-18 provides dogfight capability superior to any tactical fighter in
the Navy inventory.

Light attack capability greater than any airplane in the Naval attack
community.

And something more: reliability projected to be three times that of either
of the two aircraft it will replace.

Northrop is associated with McDonnell Douglas, prime contractor to the
U.S. Navy, for development and production of the Hornet Northrop will be
prime contractor for derivatives designed for land-based operations.

The F/A-18 Hornet More capable. More reliable. ^

NORTHROP

Making advanced technology work.

entitled to perform under the "teaming agreement" signed in 1974 for development
of the F- 18 . 180

According to the Northrop complaint, McDonnel Douglas offered the Canadians
"specific work in connection with the center and aft fuselage" (part of
Northrop' s 40% on the planes the Canadians would order), and on half of all
the planes that would be built for all other customers, including the aircraft
being built for the U.S. Navy and Marine Corps. 181

A Wall Street Journal article stated that, "The unusual legal action between
the two F18A contractors clouds the chances of the F18A in its hotly contested
competition with General Dynamics Corp.'s F16 for the Canadian order..."182

Five weeks after the injunction had been filed, McDonnell Douglas and Northrop
agreed to remove the Canadian F- 18 offer from the dispute between the two com-
panies. Agreement was reached without concessions from either company and was
intended to dispel any doubts surrounding the fulfillment of offset agreements
associated with a Canadian F- 18 order.183

McDonnell Douglas, threatened with the injunction by Northrop Corp., agreed in
federal court to not subcontract work pledged to Northrop to Canadian companies
as part of the proposed sale to Canada pending the courts resolution of its
rights. Moreover, McDonnell agreed to modify the design of the F-18A being
offered to Canada so that the aircraft will be capable of aircraft carrier
operations. This was necessary because Northrop, which originally developed

111

Chapter 11

the F- 18 design for the Air Force, contends that it has prime contracting rights
for any F- 18 model that is not designed for carrier use.

With the McDonnell concessions, Northrop agreed to withdraw its request for a
preliminary injunction blocking McDonnell from seeking the Canadian fighter
contract .

At the same time, Northrop was still seeking an injunction to prohibit McDonnell
from selling and F-18A incapable of carrier operations to Israel, and possibly
other countries, and to prevent the company from subcontracting work to third
parties that is pledged to Northrop under the teaming agreement. Northrop
itself was seeking to sell its land version of the F- 18 (F-18L) to Israel. 184

After the court denied Northrop's motion, on December 13, Northrop filed an
amended complaint, asserting additional claims. The new claims, were that MDC
had fraudulently induced Northrop to enter into agreements establishing a
confidential relationship under which Northrop furnished YF-17 technology to
MDC, and that MDC had attempted to monopolize an F- 18 market by actions,
claimed to involve unfair trade practi ces . 185

In addition to the injunctive relief previously sought, Northrop now sought to
recover not less than $100 million compensatory damages (by various means,
including an accounting to Northrop for MDC's F- 18 profits or as the value of
the technology furnished to MDC), $300 million punitive damages, and further
injunctive relief. "186

112

Chapter 11

On December 26, McDonnell Douglas filed its denial of the amended complaint,
and its counterclaims.

In its Form 8-K SEC filing, McDonnell Douglas said that it is seeking
declaratory and injunctive relief, as well as the $100 million-plus monetary
relief, for Northrop's "among other things .. .continuing violations of the
teaming and resultant agreements of the parties, the unlawful restraints of
trade which will result from Northrop's interpretations of the agreements,
Northrop's misrepresentations of its right to sell and perform work on F- 18
aircraft under such agreement, and Northrop's fraudulent inducement of MDC to
enter these agreements if interpreted as alleged by Northrop. "187

Denying the other company's allegations, MDC said it is "entitled to sell F- 18
aircraft of basically the same configuration as the F-18s sold to the United
States and foreign countries, and .. .Northrop does not have an unqualified right,
regardless, for example, of foreign offset business requi rements , to perform
specific work on such activity. 188

8. McDonnel Douglas Versus the DoD on the Creditability of its Government

Furnished Cruise Missile Work

Meanwhile a second Canadian offset related issue had become a point of conten-
tion. This involved the credibility of an inertial guidance system (INS), one
that is provided by MDC as GFE to the system prime contractor for the USAF's
Air Launched Cruise Missile (ALCM), Boeing. In mid-November the U.S. Defense

113

Chapter 11

Department asked the Canadian government not to credit the $545 million INS
contract to the McDonnell Douglas CF-18 proposal.

The DoDs objections were expressed in a letter from Dale W . Church, deputy
undersecretary of Defense for acquisition policy, to Barry C. Steers, assistant
deputy minister in Canada's Ministry of Industry, Trade and Commerce.

"It has been brought to my attention under the New Fighter Aircraft
(NFA) program industrial benefits that $545 million in Cruise Missile
Guidance has been incorrectly included under the heading for a
McDonnell Doublas Corporation offset. This particular item as dis-
cussed with your Embassy staff in Washington the day before we decided
to consent to the award for a contract to Litton Systems, Ltd. of
Canada as a seocnd source for inertial guidance systems (INS) for
our air-launched cruise missile (ALCM) program. In these discussions
it was agreed any offsets relating to such an award would accrue to
the U.S. Government and neither of the two respective U.S. competitors
for the new fighter aircraft. However, the amount could later be
used at the discretion of the U.S. by the winner to cover shortfalls
in the offset program. Your staff communicated this to your office,
and we were notified of agreement on this matter. Based on this
agreement, it is our understanding that the inclusion in the McDonnell
Douglas column is in error, and that you will make the necessary
corrections to remove the item accordingly.

We appreciate your cooperation in this matter in that a commitment
had been made to both companies that the INS award would not affect
competition in the aircraft program. I have voiced this concern to
James Bond of your office in the Embassy in Washington, and I under-
stand he has communicated it to you. We appreciate your timely action

in this regard."189

In the November 26, 1979 issue of Aviation Week & Space Technology, it was
reported that McDonnell Douglas had adopted the position of "...leaving it up
to the Canadian government to make the decision whether the $545-mil 1 ion
production offset credit for the Litton cruise missile inertial guidance
system can be included in the CF-18 proposal ."190

114

Chapter 11

The Liberals Form a New Government and the 'What's Best for Quebec1 Contro-

versy Arises

The Liberals won the February, 1980 election, and Prime Minister Trudeau proceed
ed to form a new government.

The new Defense Minister, J. Gilles LaMontagne promised to announce a recommenda
tion to Parliament by mid-April, a deadline that was finally kept.

In the interim however, one more public controversy cropped up and had to run
its course. Pratt & Whitney had reportedly succeeded in convincing four members
of parliament, led by Jacques Olivier, representati ve from Longueuil , near
Montreal, that the General Dynamics F- 1 6 offset package was better than that
for the CF-18 offered by McDonnell Douglas, and they decided to take their
case to the Canadian press. Olivier was also convinced that it was better for
his native Quebec, where a referendum was to take place in June on whether
Quebec was to maintain its provincial relationship with Canada. McDonnel
Douglas stated that it refused to "stoop to that level."

To further embroil matters LaMontagne ' s staff told the press that McDonnell
Douglas has been vague and skimpy with information on its offset package.
McDonnell Douglas was bound by a clause in the proposed contract to provide $3
billion in offset to Canada, with $1.3 billion going to Quebec.

115

Chapter 11

Canadian military officials, still concerned over durability of the General
Dynamics F-16's Pratt & Whitney FIDO engine, viewed the entire matter as a
"passing phase" that has been overplayed by the Canadian press. 191

It was feared at the time that the political controversy created by Olivier
might further delay LaMontagne 1 s imminent announcement of his government's
decision. Fortunately though, it did not.

In the final days before the decision was announced, McDonnell Douglas again
increased its offset offer to Canada to $3,260 million compared with $2,620
million for General Dynamics. Of this former amount, Quebec was to get 48.2%,
Ontario 39.7% and the rest of Canada 12.1%. The final sweetener was introduced
by General Electric which decided to locate its $60 million blade and vane
manufacturing plant for the F404 engine in Quebec.

10 . The McDonnell Douglas/Northrop CF-18 Hornet is Selected

The decision was finally announced on April 15, 1980. The McDonnell Douglas/

Northrup CF-18 Hornet was selected. Under the contract the company was to

provide 137 aircraft, but the actual number was still a function of whether,

and to what extent, the U.S. government would waive its charge for non-recurring

development costs. Depending on if and to what extent this was waived the

actual number was expected to fall somewhere between 129 and 147 aircraft.

The final decision in favor of the CF-18 over the CF-16 centered on the engine
capabilities of the two aircraft.

116

Chapter 11

In announcing the decision, Canadian Defense Minister J. Gilles laMontagne
explained that the Hornet was better suited to Canada's vast geographical dis-
tances because its two engines — as compared F-16's one — gave the aircraft
an additional margin of safety, which is especially important in Canada with
its expanse of uninhabited terrain and harsh winter climate. 192

"This means that fewer CF-18As should be lost accidently over the life of the
fleet," Minister LaMontagne stated. "The forecast accidental losses for the
CF-16 are such that initial fleet size advantage would disappear during the
life of the NFA fleet," the Defense Minister added in referring to the fact
that the $2.34 billion NFA deal would have bought more F-16's than the more
versatile and advanced Hornet. 193

In addition, the greater size of the Hornet made it easier to incorporate
improvements to the aircraft during its lifetime and thus offered more flexibil-
ity in coping with changing tactical and strategic circumstances. This was an
important consideration for the Canadians because the new fighter is destined
to stay in service with the Canadian Air Force until the turn of the century . 194

Final assembly of the CF-18 will be in St. Louis (whereas the (F-16A would
have been assembled by former General Dynamics subsidiary, Canadair, in
Montreal). The first CF-18 was scheduled to be delivered to Canada in October
1982.

117

Chapter 11

FIRST F/A-18A POE CANADA, is assembled at Northrop Corp.'s Aircraft Div. in El
Segundo, Calif. The center and aft "fuselage shipset win be sent to McDonnell Douglas in St.
Louis— Hornet prime contractor— for final assembly and delivery to the Canadian Armed
Forces. Canada has ordered 138 CF-18s. The U.S. Navy and Marine Corps plan to buy 1366,
and Australia has announced plans to buy 75.

Source: Aerospace Daily

Building of CF-18 forward-fusel age sections were to be put up for bidding in
Canada, with the strong likelihood that McDonnell Douglas of Canada (which
occupies the old Avro Aircraft plant) would be the most competitive bidder.

Other work packages would also be put up for open bidding in Canada; some would
be joint US/Canadian ventures; and others would be license agreements.

Canada's approval of the aircraft was generally considered as making it easier
to market overseas, with Australia, Greece, Turkey and Spain among the
prospective buyers. 195

11 . The Federal District Court Dismisses the Northrop Suit

The federal district court made its decision in September, 1980 on the Northrop-
MDC dispute. The court dismissed Northrop's suit. The decision raised several
issues which demonstrated the problems that may arise from such teaming agree-
ments. Northrop was quoted as saying that the issues involved in the court
decision are "so fundamental that if the decision is allowed to stand, teaming
arrangements between companies will be discouraged to the detriment of national
security consideration." While the decision will probably be appealed, and
the facts of the case are distinguishable from those of many other teaming
agreements, the issues raised in the decision point out the need for great
care before entering into teaming agreements and making business decisions
based thereon.

118

Chapter 11

The court based its decision in favor of MDC on four grounds:

Non-justiciabil ity of political questions. Basically, the court held
that the "complex statutory structure relegating to the Executive
Branch. ..the concerns for the military arsenal — its development, procure-
ment and employment (and foreign sales)" rendered it inadvisable for courts
to hear this type of case and become in effect "the super procurer and
sales licensor of a military weapons system."

Act of state doctrine. Under the long-held policy that the U.S. courts
will not "sit in judgment on the acts of the government of another (country)
done within its own territory," the court refused to examine whether
McDonnell -Doug! as 1 alledged breaches of the teaming agreement were connected
with Northrop's failure to make F- 18 sales in various foreign countries.

Indispensability of the U.S. Government as a party to the suit. Northrop
alleged that McDonnell -Dougl as violated the teaming agreement by
disclosing to foreign governments data and technology developed by Northrop.
The court held that since the data were developed under U.S. government
contracts, and that foreign disclosure required the approval of the U.S.
Government, the U.S. Government was an indispensable party to the suit.

The court also held that since government approval is required to disclose
technical data to foreign governments, under a federal statute, the sole
remedy for the owner of the data in the case of wrongful disclosure of
that data is sue the United States.

119

Chapter 11

Illegal restraint of trade/monopol 1 zation . The court held certain aspects
of the teaming agreement to be per se violations of the anti-trust laws
as an agreement by horizontal competitors to allocate markets. (Note
that the markets involved were foreign governments.) The court denied
Northrops' claim that McDonnell -Dougl as foreign sales efforts were an
"attempt to monopolize" by noting that since the U.S. Government has
"absolute and overriding control" of foreign weapons sales, any monopoly
is a government monopoly, which is outside the reach of the anti trust
1 aws .

12 . The Agreement on the Waiver of Non-Recurring Costs

Canada's Minister of National Defense, J. Gill es Lamontagne went to Washington
several months after the selection in July, for a meeting with Brown at the
Pentagon. He told reporters afterwards that they expected a proposal from
Brown that would reduce the amount of money Canada would pay for F- 18 R&D
recoupment .

The argument put forward by Lamontagne to Brown and the U.S. press was that,
as Canada has a fixed budget of $2.34 billion for the program, cutting R&D
costs would mean it could buy extra aircraft. An additional ten was quoted by
Canadian officials as a reasonable estimate. This would maximize the number
of aiarcraft that Canada would get, they pointed out, benefiting both the
North American air defense mission and the NATO mission of the Canadian armed
forces .

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Chapter 11

Canadian officials claimed they wanted the same type of fair agreement that
the U.S. government would make with any of its allies and that no favoritism,
no special relationship was being sought.

Canadian officials wouldn't say at the time how much money their government
would pay to McDonnell Douglas for ten or so extra f-18s. As the R&D situation
was still being negotiated, they felt any number would be premature. Others,
however, were saying it could be as much as $200 mill ion. 197

Lamontagne claimed that obtaining some relief on R&D payments would be a boost
to Canada's balance of payments with the U.S. on defense items. "We are in
the red on exchanges, and with the new fighter, we'll be more in the red."

Other officials said that because Canada was buying the CP-140 Aurora aircraft
from Lockheed and the F- 18 from McDonnell Douglas, "there's a danger that the
(situation) could become even more imbalanced." Lamontagne said he told Brown
that the U.S. "should make an effort to get a better balance. ..He didn't agree
with (the idea of) more purchases (by the U.S. of Canadian defense items),
but he took the point well that (the current situation) can't go on forever..."

Lamontagne, asked about recent criticism of the F-18, said "I'm very confi-
dent...I've never lost confi dence . . . I have always taken (the) criticism as not
fair to the F-18 or the company (McDonnell Douglas). I know new pi anes . . .have
bugs and snags, but they will be corrected...! can't see (why) these people
are trying to destroy such a good plane. "199

198

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McDonnell Douglas officials, asked about bulkhead and wing problems with the
F-18, said neither was significant. In the case of the bulkhead, cracks were
found, but they were in a fatigue test article and were caused by improperly
drilled holes. On wing problems, they said engineers postulated a potential
flutter at certain speeds and in certain configurations, and to solve it layers
of graphite composit were being added. This was to stiffen the outer wing,
but also added a little weight. Also helping was the movement forward by five
inches of stores pylons, and shifting forward by a similar amount of the wingtip-
mounted Sidewinder missiles, officials said. 200

Some eight months after selection of the CF-18, the two governments were able
to reach an agreement on recoupment of previously incurred research and develop-
ment costs. Defense Secretary Harold Brown and his Canadian counterpart, Gilles
Lamontagne, announced on December 17 that they had concluded negotiations on
an arrangement by which the U.S. undertook to reduce such non-recurring costs
by up to 70 million dollars in exchange for a Canadian government commitment
to boost its buy of CF-18s by 8 aircraft, from 129 to 137. This involved the
commitment of Canada to match the 70 million dollars waived by the U.S. by an
equivalent addition to the defense budget for the CF-18 purchase during the
period of the program. The arrangement also enabled Canada to buy up to 20
attrition aircraft without payment of any related research and development
charges, established at $877,690 per aircraft if the Canadian government decides
to exercise an option in the contract with McDonnell Douglas. 201

The Pentagon said that, "in arriving at this agreement, such factors as the
complete integration of air defense arrangements for North America with its
implications for standardization, the long and close relationship existing be-
tween Canada and the United States, and the Production Sharing Agreements
between the two countries were considered ."202

The following memo concerning recoupment of nonrecurring cost for the F/A-18
aircraft, was sent by Navy Secretary John Lehman to Deputy Defense Secretary
Frank Carl ucci on Dec. 14 1981.

By memorandum of 1 August 1979 the Director, Defense Security Assist-
ance Agency (DSAA) approved a charge of $877,690 for the recovery of
nonrecurring costs for each F- 18 aircraft sold to foreign countries.

That charge was calculated based on certain assumptions about non-
recurring costs incurred, and projected to be incurred, and the total
number of aircraft to be produced. The nonrecurring cost was projected
to be $1,998,500,000 and the anticipated production run was 2277
aircraft (1377 for the U.S. Navy and 900 for foreign sale.) The unit
recoupment charge of $877,690 was applied (and reduced) in the case of
the purchase of the F-18 aircraft by Canada and has been used in current
discussions with Australia.

Significant changes to the original assumptions have occurred. The non-
recurring cost is now expected to be $2,730,400,000. Furthermore, all
the foreign sales do not appear likely to materialize. Rather the sales
are not likely to exceed 500 aircraft. Thus the unit recoupment charge
should be approximately $1,454,715 on the basis of this current information.

This disparity between the DSAA established nonrecurring recoupment charge
and one which will recoup a fair share of our investment illustrates the
deficiencies inherent to our present method of calculating nonrecurring
cost recoupment. These deficiencies include: (i) establishing recoupment
charges long before we know either the actual nonrecurring cost or a
realistic sales projection; ( i i ) failing to adjust the nonrecurring
recoupment charge when the original assumptions on which it was based
prove erroneous and (iii) disregarding the effect of inflation on the
nonrecurring charge, thereby penalizing ourselves and those countries who
take the risk associated with buying systems early in production and
rewarding those who buy last.

These deficiencies need to be examined and I suggest that DSAA be tasked
to examine alternate ways of calculating nonrecurring cost recoupment

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which would correct these deficiencies. In the meantime authority is
requested to change the nonrecurring cost recoupment charge for the F- 18
to $1,454,715 per unit and to use this amount in calculating prices to be
provided to the Government of Spain during discussions which are presently
in progress and in all future sales of the F-18 aircraft.203

13 . Issues Raised by the CP-18 Offset Arrangement

By early 1981 McDonnell Douglas was able to report that it and its suppliers
have pumped $380 million into Canada as part of the industrial off-set program
for Canada 1 a CF-18 contract. The McDonnell Douglas announcement covered the
period between March 18, 1977 and the end of 1980. The Company said the business
funnel ed to Canada was almost double the $193 million contract goal for that
period. A McDonnell Douglas spokesman said a "large part" of the off-set
contracts concluded in Canada were arranged before Canada selected the CF-18.

Products covered in the report include F-18 machined parts, transmitters, fuse
tubes, components and tooling for the McDonnell Douglas DC-9 Super 80 transport.
General Electric F404 engine and J79 engine components, castings, forgings,
plastics, lighting panels and other parts. Some 252 Canadian firms were
involved in the off-set program. 204

Later that year, in September 1981, officials of McDonnell Douglas addressed a
symposium on international co-production, industrial participation and offsets
at the Defense Systems Management College (DSMC) in Fort Belvoir, Virginia.

The McDonnell Douglas officials suggested that, based on their experience with
the Canadian NFA competition, the DoD should reverse its hands off policy on
offset arrangements , and lay down at least some ground rules to restrain

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bidder wars between U.S. firms over foreign sales, such as that which developed
over the Canadian NFA.205

In thi s program, as in the Canadian LRPA (CP-140) program before it, offsets
were not granted while directly under the gun of foreign competition, but to
best other U.S. defense contractors. It is one thing for U.S. firms to
engage in this sort of bidding as a lesser of evils ( i . e . , share, or get none
of the action at all) when facing off against foreign competition. Here it
becomes virtually impossible for the contractors to counter the buying govern-
ment's divide and conquer policy. When the contestants involved are all U.S.
firms it's much less palatable to watch work be auctioned off that would have
otherwise gone to U.S. subcontractors , whichever U.S. firm won. But then the
obvious question arises, if the DoD intervened to enforce such a policy, what
would keep the procuring foreign government from ensuring the participation of
non-U. S. firms up to the final source selection, so as to avoid the extra U.S.
government leverage that would result from such a monopoly?

In any event, the scale of the Canadian CF-18 offset agreement served to fuel
the debate within U.S. government and industry over the merits of offsets.
Unlike the F-16 sale to the four nation consortium in 1975, there were no
foreign competitors amongst the finalists.

McDonnell Douglas officials began to complain soon after contract award of
difficulty in meeting their commitments. Reflecting the division in the ranks
of the U.S. aerospace industry, McDonnell Douglas suggested at the DSMC

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symposium that offsets be restricted to a ceiling of 25-35 percent of the
imported value, whil e General Dynamics recommended against the U.S. Government
attempting to set arbitrary limits on offset deals. 206

Though the CF-18 offset program was not without numerous precedents in both
the range of offsets offered and the percentage of the purchase value covered,
its size in absolute terms added enough fuel to a long simmering debate to
ignite a re-examination of U.S. policy in this area.

In 1981, the new administration established a task force to re-examine the
DoD's coproduction policy, and the organization required to best implement it.
The task force was set up by the Under Secretaries of Defense for Research and
Engineering (USDR&E) and Policy, Mssrs. Del auer and like respectively , and was
concerned not only with offset arrangements 'per se', but with the broader
issues of technology transfer and the long term impact that these arrangements
will have on the U.S. industrial base. There is a feeling in some quarters
that thi s may auger the opening of a new front in the current administration's
"get tough" campaign vis-a-vis technology transfer and trade (e.g., steel
imports and the pipeline embargo).

An unpublished working paper of the Aerospace Industry Association (AIA) in
1981 stated, "The spectacle of the recent Canadian fighter competition and the
success of the 'divide and conquer' procurement policy of the Canadian govern-
ment establishes a new milestone for others to emulate." The Chairman of the
AIA committee that produced the above working, Grumman Internation Co. Vice

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Chapter 11

President, Fred Raymes , was quoted in the February 20, 1982 issue of National
Journal . "Several foreign countries have noted the Canadian government's
success and have already revised their modest expectations by becoming signifi-
cantly more demandi ng . "207

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Chapter 11

H . The Spanish New Fighter Aircraft Competition

On June 23, 1982, NATO's newest member state, Spain, selected the McDonnell
Douglas F-18A over the General Dynamics F-16 in yet another run-off between
the two fighters (Australia had in the meantime selected the F- 18 over the
F-16 for a 75 aircraft program involving offsets). The contract was for 84
aircraft (including spares and training) totaling around 3 billion dollars, it
was Spain's largest single arms purchase ever. The 84 F - 1 8 A ' s were to replace
Spanish McDonnell F-4's and Northrop F-5's, which were also the two F- 18
partners .

The competition had originally included -the Dassaul t-Breguet Mirage 2000 and
the Panavia MRCA Tornado, as well.

The Spanish government had originally envisioned a buy of 144 aircraft, but it
had to reduce the quantity by 60 because of the F- 18 price increase and the
rise of the dollar vis-a-vis the peseta.

The government's decision had been delayed over a year. A special commission
consisting the Ministers of Defense and Industry, plus the head of the Spanish
Air Force, had taken four years to make the choice. To quote Le Monde,

The commission eliminated the Mirage 2000 in order to diversify
Spain's suppliers; al ready possessing the Mirage III and the
Mirage F-1.Z08 The Tornado seems to have been abandoned for
technical reasons, inspite of the socialist party which pre-
ferred a European aircraft. The F-16, . ... remained the

final competitor, but General Dynamics lost the battle, because

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it did not offer as much in the way of industrial offsets as
its competitor. 209

Offsets agreed to by McDonnell Douglas include shoe manufacture technology
exchange and construction offered to Construcciones Aeronauti cas S. A. (CASA)
of the following F- 18 parts:

Leading edge extension.

Leading edge flaps.

Speed brake.

Aft fuselage side panels
Stabil ator .

Dorsal deck covers.

Rudder assemblies.

McDonnell Douglas officials expect negotiations on the contract to start
Sept. 1 , 1982 with completion in mid-December .210

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I . Northrop and the 1982 Turkish Fighter Competition

As of mid-1982, offset terms were emerging as a possibly decisive factor in a
Turkish competition between Northrop and General Dynamics. For Northrop, the
outcome has taken on added importance since the U.S. government turned down a
request to sell the F-5G to Taiwan and the company has not yet found another
overseas market for the advanced version of the plane. 211

After the United States lifted its partial arms embargo on Turkey in 1978,
Turkey postponed modernization of its armed forces while it grappled with hug
foreign debts and an economic crisis. Now, Turkey's NATO-assigned armed
forces are moving forward with plans to acquire new equipment that could cost
as much as $5.6 billion. 212

Turkey is giving priority to obtaining sophisticated fighter airplanes to
replace planes that are already obsolete, or will be so by 1984. Ankara has
reportedly narrowed its shopping list down to F-5s , F- 1 6s and F-18s . The U.S
government has authorized $400 million in foreign military sales credits for
Turkey, but this alone will not make it possible for Turkey to cover its
needs . 213

This was the problem uppermost in the minds of members of a Northrop
commercial team that spent almost two months in Turkey in April and May 1982
interviewing officials, businessmen, and trade associations in order to take
an inventory of Turkish companies with export potential .214

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When the U. S. Navy and Marine Corps needed a single versatile aircraft to replace both
the F-4 Phantom and the A-7 Corsair, they selected the multi-role F/A-18A Hornet.

The F/A-18A provides dogfight capability superior to any tactical fighter in the Navy inventory.

Light attack capability greater than any airplane in the Naval attack community:-

Reliability projected to be three times that of either of the two aircraft it will replace.

Northrop is associated with McDonnell Douglas, prime contractor to the U. S. Navy, for
development and production of the Hornet. Northrop will be prime contractor for derivatives
designed for land-based operations.

The F/A-18A Hornet. More capable. More versatile.

NORTHROP

Making advanced technology work.

Much like the Swiss F-5E sale of 1975, under a proposal that Northrop is working
out, the company would guarantee to find markets in third countries for tens
of millions of dollars' worth of Turkish wine, refri gerators and other products,
in return for Turkey's selection of one of Northrop's planes, either the F-5G
or the F-18L, over the General Dynamics F- 16 or the McDonnell Douglas F-18A.

As part of this effort, officials of Northrop spent a day visiting vineyards,
inspecting wineries and sampling the pleasant local vintages that are little
known outside the country .215

In addition to promoting such items as wine and refri gerators , Northrop official
say they have told Turkish construction companies about projects in Nigeria
and Saudi Arabia that could earn money for Turkey and might count as offsets
against plane purchases. Northrop's role, officials stress, would not be to
buy the wine or refrigerator as payment for planes, but to locate a foreign
merchant who might want to import it. 216

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Chapter 11

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Greek defense officials visited several Western nations during the Spring of
1982 to evaluate combat aircraft in preparation for a decision later in the
year or early 1983 on the selection of a new fighter for the Greek Air Force.

Fighter candidates heading the list include the General Dynamics F-16 , McDonnell
Douglas F-18A, French Mirage 2000 and the British/German/ I tal ian Tornado.

Any selection of the new fighter will be linked to favorable arrangements for
military coproduction, which would be centered around the Hellenic Aerospace

Industry .218

Panavia made its first Tornado proposal to the Hellenic Air Force in 1980 for
60 aircraft. In 1981, a team from the Air Force New Fighter Aircraft Committee
conducted a detailed flight and ground evaluation of the Tornado. Evidently,
the former Greek air chief of staff in 1981 recommended the Tornado as the
aircraft required to meet the Greek Air Force's future aircraft needs, but
the Greek gov-ernment asked for a new evaluation after Andreas Papandreou became
prime minister and defense minister in the fall of 1981.219

With the competition reopened, Panavia Aircraft GmbH offered Greece an offset
package valued at $850 million to $1.7 billion in May 1982, to encourage Greek
selection for the Tornado multirole combat aircraft (MRCA) as its future

fi ghter .220

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Chapter 11

Blickfang: Di© AuBenlasten der F-18 ©rlauben ein© prazise Ortung mit dem Radar

Schokoladenseite: Von oben und von der Seite gibt es wenig Reflexionsflachen

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Panavia's 100% offset package was based on a buy of 50-100 aircraft. The package
was outline to the Greek minister of state for national defense, Georgios Petsos,
who was in Germany in early May, 1982. Petsos toured the trinational facility
in Munich, where the proposal for the Greek new fighter program aircraft was

discussed .221

Panavia is offering 100% offset of the total possible contract value and part-
nership status for Greece in the Tornado program, including direct access to
the technological skills of Panavia's partner companies, Aerital ia , British
Aerospace and Messerschmi tt-Boel kow-Bl ohm (MBB).222

During his visit, Petsos discussed details of the Panavia offer with representa-
tives of the Panavia consortium, including Gero Madelung, chairman of the Panavia
board of directors and also, of MBB.223

The offset package includes coproduction of the Tornado with the Hellenic Aero-
space Industry, cooperation between Panavia and its consortium partners and
subcontractors with Greek industry in other aerospace and defense industry
projects, and joint ventures in nondefense-related projects. A decision by
the Greek government to acquire the Tornado would lead to:

Manufacturing and assembly of components for the aircraft in Greece, along
with test and repair of the Turbo-Union RB. 199 engine. Avionics capability
also would be transferred to the Greek aerospace industry.

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Chapter 11

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Transfer of other defense industrial capability to Greece, including manu-
facturing of ship mines and antitank weapons.

* Support of and assistance in selection of a new trainer aircraft for the
Greek air force.

Transfer of solar and wind energy technology.

* Installation of liquid gas pipelines in Greece.

Improvement in Greek fish farming capabi 1 i ty .224

Panavia also offered to assist in Greece's agricultural development, while
promoting Greek products on the world market and fostering tourism. 225

During a lightning visit on April 23, 1982, the French Socialist Defense
Minister, Charles Hernu , flew into Athens and signed a Memorandum of Under-
standing (MOU) with his counterpart, Andreas Papandreou (who is also Prime
Minister, holding the defense portfolio as well). The MOU was to provide a
framework for Franco- Greek cooperation in weapon system procurement. Under
negotiation since November 1981, one month after the Greek socialist party
came into power (after a heavily anti-American electorial campaign), and discussed
principally with the Greek secretary of state for defense, Georges Petsos , the
framework MOU was to further the growth of the Greek aerospace industry though
recourse to French technology for production of equipment, and direct purchase

from France. 226

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Chapter 11

It was within this framework that commercial discussions began between Dassault-
Breguet and the Greek government, over the French entry in the new fighter
aircraft competition, the Mirage 2000 fighter plane.

The Franco-Greek MOU has attempted to address the problem of how Greece is
going to be able to sustain the major defense procurement effort underway.

The plan is to attack the problem from two angles. One, involves the develop-
ment of its own defense industry, and the other focuses on a reduction in costs
by grouping and planning procurements so as to eliminate the usual costly inter-
mediaries. France, for its part, plans to assist by contributing to the develop-
ment of the naiscent Greek armament i ndustry .227

The MOU signed in Athens does not presuppose a privileged position for France
in the current and up-coming negotiations, but, will no doubt further contribute
to the close working relationships that the two recently elected socialist
governments are actively seeking to nurture .228

As the heat of the competition rose, in October 1982, Panavia offered a more
detailed and generous offset proposal to the Greek government .229 under terms
of the revised proposal , Panavia and other companies associated with the Tornado
program agreed to assist Greek companies to:

Perform final assembly of both the airframe and the Turbo-Union RB.

199 engines powering it for the 60 aircraft purchased by Greece.

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Build airframe and engine components, avionics equipment and ground
support equipment for all Tornado aircraft produced after the agree-
ment is signed.

Produce a variety of modern munitions under subcontract from Mauser,
which builds the Tornado's guns.

Coproduce and assemble either the Messerschmi tt-Boel kow-Bl ohm Kormoran
anti ship missile or the British Aerospace Dynamics Skyflash missile,
or both, if the missiles are selected to arm the Tornados.

Participate in a joint venture program for integration of advanced
weapons systems, including radar-guided antiaircraft artillery. One
of the primary systems integration companies in the Tornado system
would provide training and technology transfer for the program.

Build one of three trainer aircraft selected by Panavia, with Panavia
to provide worldwide marketing support. The three aircraft under
consideration are the British NDN Firecracker, the West German
FI ugzeug-Union-Sud Flamingo and the Rhein-Fl ugzeugbau Fantrainer.
Obtain increased capacity to overhaul gas turbine engines.

Obtain training, technology transfer and support in developing an
aircraft tire retread facility in Greece.

Receive assistance in devloping a Tornado overhaul and repair facility
for aircraft sold to other nations, as well as Greek participation
in the future Tornado sales program.

Establish an ejection seat and safety equipment overhaul facility in

Greece .230

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Chapter 11

In addition, Panavia expanded its offer to provide assistance in an additional
energy-rel ated program, i . e . , the provision of hard coal supplies; also environ
mental programs, such as recycling of used plastics; development of an aluminum
production facility; and other non-aerospace projects.231

These would include in addition to those previously offered, the development
of a ship-breaking yard.

Panavia studies indicated that by the year 2000 the aerospace- and defense-
related portions of the proposed offset plan would return to Greece more than
50% of the cost of the Tornado procurement and the non-aerospace portions would
more than double this total, effectively providing the Greeks with about 120%
offset on the purchase of the Tornado.232

With the political overtones of this source selection clear, and the limits to
which the Tornado participants and France are willing to go, McDonnell Douglas
Northrop, and General Dynamics, all face an uphill battle, especially as they
have already strained their capacities to absorb new industrial partners by
the extensive offset deals worked out with their initial foreign customers.

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K. France and Its AEW Requirement

France was a Tow-key participant in the NATO subgroupings exploring a common
solution to the NATO Airborne Early Warning and Control requirement from 1970-78,
but in the end, opted not to commit itself because of: implications vis-a-vis
the NATO command structure; assessment that a. nationally owned system was
required that would permit the operational flexibility to cover the Atlantic
and Medi terranean approaches to targets key to its nuclear strike forces, plus
meet substantial overseas commitments; insufficient work content for France;
and a perception that the E-3A was too sophisticated for France's needs.

What the French Air Force felt it needed at that time was simply a flying radar
platform that would allow it enough warning time to be able to set off the
trip-wire of its nuclear strike forces in case of conventional attack on France,
while offering some operational flexibility for overseas deployments; i.e.,
not a full blown command and control system. Starting in 1977 France decided
to re-examine the E-2C Hawkeye as a more limited system that appeared to be at
least roughly in line with France's operational performance needs, a system
which the NATO Air Force had rejected in 1974 as not sophisticated enough to
meet NATO's needs. The E-2C became the front runner and demonstration flights
finally took place in 1980 and 1981.

The Grumman Company invited a small group of French journalists in late
November, 1981 to its Bethpage, Long Island plant, where the E-2C Hawkeye is
assembled. The objective was to present the aircraft (and the concept upon

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which its utilization rests), demonstrate the diversified nature of the firm's
activities, as well as its commitment to seeking out closer relationships with
the French aerospace industry and concluding agreements with other sectors of

French i ndustry . 233

Within the framework of this effort, simultaneously with the announcement in
France, it was announced that an important contract representing a piercing of
the U.S. market by the Ariane launcher was signed. A representative of Ariane-
space , present at Bethpage, underlined the significance of this event and the
role played by Grumman in it. He recognized that at the time of Arianespace ' s
establishment 18 months ago, the idea of orders ever coming from the U.S. was
simply unthinkable. He attri tubed the success of Grumman 1 s effort to the
American contractor's knowledge of space and of the potential launcher market
in the U.S.234

In the specific area of aeronautics, Grumman has already had, or soon planned
on having, contacts with French industrialists. Certain among them have been
offered possible deals (e.g. Thomson-CSF, Crouzet, and Turbomeca). Others,
such as SOGERMA, were reportedly interested in maintenance work associated
with any eventual French government order of the Hawkeyes.233

Until the fall of 1981 the French had been considering only the Hawkeye and
two systems which would involve "Nimrod-type avionics" ( i . e . , the Marconi radar
system) installed on French-built airframes; either the Aerospatiale C- 160
Transal 1 cargo/troop transport or the Dassaul t-Breguet Atlantic Maritime Patrol

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Aircraft. Neither of the Franco-British systems could be deployed before the
end of the decade and both were more expensive than either of the American
systems .

In January 1982, the French government changed directions and asked Boeing for
proposals for three, four, or six AWACS aircraft. Boeing responded by sending
pricing and availability data to France on March 15.

Boeing demonstrated the E-3A for the French Air Force in a series of flights
in June and July based out of Mont-de-Marsan in South Western France. To quote
an article by Jacques Isnard entitled, "An Enthralled French Air Force: the
Boeing AWACS Demonstration at Mont-de-Marsan," in the July 17 , 1982, issue of
Le Monde, page 7.

The French Air Force is particularly satisfied with the results
of the recently completed demonstration flight of a Boeing AWACS
E-3A radar plane involving technicians from its base at Mont-
de-Marsan .

"We searched in vain for gaps in its detection capability,"
admitted one high ranking officer who flew on the radar plane,
"but who also fears... that extremely strong praise might diminish
the manufacturer ' s incentive to make financial concessions in
the event of contract negotiations.

Flying over Dijon, the AWACS detected airplanes that were con-
cealing themselves by weaving through alpine valleys. North of
the Balerics, above the Western Mediterranean, the same plane
was able to detect aircraft taking off from the Maghreb North
Africa , in Italy, and even as far away as Yugoslavia. Few
incursions by intruders apparently escaped its scan. . . .

With a great deal of discretion, the Pentagon let it be known
that, taking into consideration the importance of a possible
French order, the U.S. could consent to the granting of certain
benefits, without straying too far from the price paid by the

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NATO countries. NATO will receive up through 1986, 18 Boeing
AWACS stationed principally in the Federal Republic of Germany,

Greece, Italy, Turkey, and Norway.

The aircraft, an Air Force Systems Command RSD model stationed at Boeing's
Seattle plant, was loaned to Boeing for the tests and manned by a Tactical Air
Command crew and Boeing personnel. According to French military officials,
the French Air Force in early August was looking over tapes from the flights
and "evaluating the plane's performance against its own defense requirements."
Pentagon officials confirmed reports that the French Air Force was leaning
towards the plane. 236

But Pentagon officials stressed that French economics and political factors
may prove more important to the sale than costs. "The strength of the dollar
isn't helping any," one official said. 237

More importantly , the political differences between France and the U.S. were
seen to be easing. Pentagon officials said a major U.S. policy change was in
the works, one that would ease U.S. opposition to the natural gas pipeline to
be built from Siberia to Western Europe. "There is a growing realization of
how important France is to defense," one said, "German defenses are thin— if
the Soviets made a conventional strike, they would be in France before any one
knew what was happening." America's chief NATO allies, including the United
Kingdom, Italy and the Federal Republic of Germany, have joined France in
criticizing U.S. attempts to obstruct the building of the pipeline. 238

142

Chapter 11

U.S. military officials pointed out that for NATO defense, the AWACS had the

advantage of longer range and more time on target, as compared with the

E- 2C .239 /\ final decision between the E-2 and E-3 was expected by early 1983.

On June 1, 1982, Boeing submitted its E-3A offset proposal to the French
Government. The proposal pointed out Boeing's history of procurement from
French sources, promoting of French designed systems ( e . g . , Excocet and
Roland), and in particular its important role in the success of the CFM-56
engine.

The CFM-56 engine is a 50/50 joint venture between France's SNECMA and General
Electric. Boeing has promoted the CFM-56 through its 707/CFM-56 certification
program, (and thereby can offer it for the FAF E- 3A 1 s ) the USAF/French Air
Force KC- 135 reengining (currently only 10 aircraft under contract but a
strong probability of at least 300 aircraft (of total of the USAF 600
KC- 135 1 s ) and all 11 of France's C- 1 35 F ' s ) , the 737-300 program which is
utilizing the CFM-56, and most recently its ECX, submarine communications
aircraft being proposed to the U.S. Navy by Boeing. Boeing also outlined work
packages to be offered on the E-3A by major subcontractor Westinghouse , and
other Boeing Aerospace Company missile, aircraft and space projects, if France
selected the E-3A.

On July 27, 1982 Boeing held a symposium to elaborate further on Bid
Opportunities to French industry tied to the procurement of E-3A' s by the
French Air Force at the GIFAS Aero Club de France in Paris. Later in 1982 and

143

Chapter 11

E-3A

AIRBORNE WARNING AND CONTROL SYSTEM

early 1983 Boeing teams completed a survey of some 55 French aerospace firms
as part of the AWACS offset pain.

Once again the decision slid. In October 1983 though, the E-2 was eliminated
from the competition and an FMS proposal /pricing began shortly thereafter for
the acquisition of three AWACS.

In January 1984 Boeing announced the award of a contract to CFMI , including
$78 million in French offset for CFM-56 engines content for a foreign
customer. A new offset pain detailing the work was issued by Boeing in June ,
packages from the AWACS as well as other Boeing projects and divisions which
were to meet offset requirements of the French government. By mid-year bottom
line negotiations had resulted in several moves by Boeing culminating in an
agreement to: a commitment of 35% by two years after delivery of the last
aircraft; with an objective of 50% by five years after delivery.

144

Chapter 11

L. Conclusion

As- the U.S. Government's policy towards cooperation with our European allies
in arms procurment has blown hot and cold over the last third of a century
since NATO was setup, the European allies have moved towards greater self-
reliance. While continuing to cooperate, as they have assumed a greater share
of the burden, the European's have demanded a greater share of the work. As
covered earlier in this chapter, the constituent social democracies of the
North Atlantic Alliance must assure that the tax payers back home get their
share of the benefits, if they are to support the burden of maintaining their
respective national defense efforts. By no means is this phenomenon unique to
the arms trade, but given the relatively few, but large scale government acquisi-
tions involved, the international product cycle wherein production is even-
tually shifted over to the consuming nations (at the origin of the existence
of multi-national corporations, see chapter 14), it occurs much more rapidly
than with comsumer products and non-defense capital goods. Moreover, given
the endemic overcapacity problems of all the national defense industries on
both sides of the Atlantic and the high powered support that most governments
provide for their competing systems; is there any wonder it's a buyer's
market?

Even though the impact of these developments on the U.S. industrial base
(especially at the lower tiers) is highly unfavorable, the ability of any
government to regulate these forces, either unilaterally or within some
multi-lateral framework, is severly limited. The recent atempt of the DoD to
define its policy in the area of inter-allied collaboration and to reorganise
so as to be able

145

Chapter 11

to more closely monitor and coordinate U.S. industrial activities, is 1 audible.
One might hope, however, that futile and dangerous tendencies toward unilateral
control of this process and the punishment of recalcitrant allies will be held
in check.

In its understandable efforts to avoid, or at least minimize, the recurrence
of offset programs similar to those with the Canadian government over the CP-140
maritime patrol aircraft and the CF-18 fighter, one has only to look at the
Dutch German agreement over the Leopard II, and the more recent Greek and Turkish
fighter competitions, to be freed of any illusions over how far the U.S. can
go in this direction. Foreign governments will simply avoid ever reducing the
list of finalists to a U.S. systems only run-off.

Mode #6 of industrial collaboration, upon which this chapter focuses, is
generally the least preferable when selecting Modes of industrial
collaboration. From a rational ecomonic point of view. Modes 3, 5, or 8 of
joint design and development, or Modes 1, 2, 4 and 7 of joint production, are
usually preferable to the Mode #6, when they are feasible options. However,
due to the size of the requirement or the timing of the procurement very often
they are no longer feasible or at least cannot provide politically acceptable
offset work packages in of themselves. In the latter case they often have to
be complimented by resorting to bi-lateral offsets in addition to the primary
Mode of industrial collaboration, e.g. the Belgian HELIP add-on, or the FRG
with the NATO AWACS project.

146

Chapter 11

These bi-lateral barter-like agreements offer a full range of options as sum-
marized on pages 3 and 4 of this chapter, and spelled out in detail by the
individual projects covered herein.

It is easy to point out the inefficiencies of such agreements and the fact
that they cut against the grain of free trade, which are both undeniably true
In a scenario where its always lesser of evils, however, this Mode of
industrial collaboration will continue to provide the necessary glue for the
cementing together of many of the inter-allied arms deals.

147

Chapter 11

Iwith the closing of the gold window of the U.S. Treasury and the shift from
the Gold standard to a floating exchange rate system in 1971-3, this became
less important. Because of this factor and an evolution of the attitude in
the FRG these offset agreements ended in the early 1970's.

^Several major projects involving license production in Canada of U.S. fighters
are treated briefly elsewhere in this paper: the F-86 Sabre during the early
and mid-50's in Chapter 5; the F-104 Starfighter during the late 50 1 s and early
60' s in Chapter 7; and the CF-5 in the second half of the 60 ' s and early 70s
in Chapter 6. The evolution of the overall U .S.-Canadi an development and pro-
duction relationship is covered in Chapter 5 and Chapter 10. More recently,
major projects involving production sharing between the two nations have tended
to be offset arrangements , and are therefore treated in this chapter: the
purchase of 9 CH-47 Chinooks (CH-147), 18 CP-140 maritime patrol aircraft, and
137 CF-18 fighters.

^Herbert J. Coleman, "British Phantom Cost Doubled with Switch to Spey Engine,"
"Aviation Week & Space Technology, August 19, 1968.

4The UK originally projected an order of 292 F-4's, but as it turned out, as a
result of a policy of Angl i ci zation , i.e., introducing indigenous avionics
equipment and the Rolls Royce Spey engine, only 170 were ordered. Initially
50 were to be for the Royal Navy and 120 were for the RAF. However, with the
decision in late 1967/early 1968 to scrap her aircraft carriers and disband
the fleet air arm, this distribution was changed with only 28 going to the
Royal Navy, and the rest being for the RAF. The Ark Royal was being refitted
to take the remaining 28 Royal Navy Phantoms at a cost of $80 million.

5Col eman , op. ci t.

^Herbert J. Coleman, "Massive Budget Rollback Slices British Power; F-111K
Canceled," Aviation Week & Space Technology, January 22, 1968, p. 17.

7 1 bi d . , p. 18.

^Coleman, "...Phantom Cost Doubled...", op. cit.

9 1 bid.

lOjohn Stanley and Maurice Pearton, The International Trade in Arms, Praeger
Publishers for the Institute for Strategic Studies, London, 1972, p. 107.

1 1 1 bi d . , pp. 108-9.

12Ibid., p. 109.

2 1 bid.

1 4 1 bi d . , p. 110.

^George Thayer, The War Business: The International Trade in Armaments, New
York, Simon and Schuster, 1969, pp. 229-232. ~

ISColeman, "Massive Budget Rollback...," op. cit., p. 17.

17 1 bid .

ISjhis estimate of savings is based on the British estimation of cancellation
charges of $120 million, but the DoD was simultaneously quoting a figure of
around $300 mill ion .

l^The DoD had previously been informed of a probable 10-15 aircraft cut in the
F-111K order, but had been assured that a complete cancellation was not con-

148

Chapter 11

tempi ated. Defense Minister Healey was, however, forced to eat his words
after losing a hard fought battle with his cabinet colleagues.

20col eman , "Massive Budget Rollback...," op. ci t . , p. 19.

^Herbert J. Coleman, "U.K. Aerospace Exports Near Peak", Aviation Week & Space
Technology, September 16, 1968, p. 26.

22 1 bi d .

23fhis figure was orignally $100 million, but the Germans threw in a last minute
demand for an increasse that upped it by $25 million.

2^Arnol d M. Berry, Captain, USAF, and Edward A. Peterson, Captain, USAF, RF-4
Coproduction: United States and Federal Republic of Germany, a thesis presented
to the Air Force Institute of Technology ( AF IT), January, 1975, pp. 39-40 and
49-50.

^Aviation Week & space Technology, "Germans Seek RF-4E Subcontract Guarantees,"
November 4, 1968, p. 22.

26it is interesting to note, as pointed out by Berry and Peterson, that although
the agreement between the governments of the U.S. and the FRG indicated the
willingness of General Electric and McDonnell -Doug! as to take certain actions
in support of the agreed to offsets, neither firm signed the agreement nor did
they make a written agreement with the U.S. Government. The U.S. Government
was legally totally on its own.

27 Avi at i on Week & Space Technology, January 29, 1968. p . 28.

This total required F-4 order level was actually exceeded by a considerable
margin several years later, but too late for the exercising of this option.

This involved an additional F-4 order by the FRG in 1971 of 175 of the F-4F
version of the Phantom to fill the ever expanding gap prior to the MRCA Tornado
becoming operational .

This purchase was the major purchase helping the FRG to fulfill its troop-
offset commitments to the U.S. during the period of 1971-73.

2§Avi at ion Week & Space Technology, May 20, 1968, p. 29.

30"Luftwaff e Rejects Mirage 3R, Continues Push for RF-4E' s ," Aviation Week &
Space Technology, September 2, 1968, p. 21.

31"U.S. Pressure Against European Fighter Seen," Aviation Week & Space Technol-
ogy, January 13, 1969, p . 20.

^Edward H. Kol cum , "RF-4E German Offer Bolstered," Aviation Week & Space
Technology , October 28, 1968.

33 j bi d .

34"Germany to Offset 75% of U.S. Troop Costs," Aviation Week & Space Technology,
July, 1969.

35 j bi d.

36 1 bid .

37 1 bi d .

38"u .S. , West Germany Reach Offset Agreement," Aviation Week & Space Technology,
July 21, 1969, p. 16. '

149

Chapter 11

^Edward H. Kol cum , "RB.199 Picked for MRCA; GE Leads in A-300B Race," Avi ati on
Week & Space Technology, September 8, 1969.

40"U.S.-, West Germany . . . p. 16.

1 bid.

42u.S. also was discussing awarding the German industry overhaul and maintenance
contracts for Spanish F-4's if the U.S. agreed to provide this aircraft to
Spain as part of the payment for American bases there. The Spanish base nego-
tiations were still under way, at the time, and never did lead to a Spanish
F-4 acquisition. ("German CH-53 Procurement Price Climbs," Aviation Week &

Space Technology, November, 1968, p. 28.

43"Two German Companies Win F-4 Subcontracts," Aviation Week & Space Technology,
June 16, 1969, p. 24.

44(3erry and Peterson, op. cit., p. 85.

4572.31 M of this figure was from orders placed by McDonnel 1 -Dougl as under its
1968 and 1971 bid packages. The following month the FRG finally compromised
with the U.S. and accepted $20 M of a total of $64.04 M worth of orders as
creditable. These orders were placed by the German Government with German
industry for support of the RF-4E under a General Electric license to Motoren
and Turbinen Union (MTU) for the manufacture of jet engines, and a Litton license
with its German affiliate LITEF for navigation systems.

46gerry and Peterson, op. cit., p. 96.

47 Thi s in turn had been preceded by another shift a year earlier. The DoD had
originally seen the matter as a purely industrial affair, but as a result of
the October-November 1968 negotiations with the FMOD , the DoD agreed to use
it's "best efforts" to have those U.S. firms associated with the RF-4 select
items for competitive subcontracting to the German aerospace industry, with
the objective of placing up to $125 million in orders over the period 1969-1972
(later extended).

48The German Federal Association of Aerospace Industries, which was the desig-
nated coordinating agency for the German aerospace industry. In the FRG such
'spitz' or 'peak' associations enjoy a quasi-go vernmental status.

49Berry and Peterson, op. cit., p. 95.

50 1 bi d . , pp. 31-32.

51 1 bi d . , pp. 93-94.

5 2 1 bi d . , p. 60.

5 3 i bid , pp. 98-99.

54 1 bi d . , pp. 99-100.

55 1 1 must be remembered that the Leopard I was the result of the German half
of the joint Franco-German tank project (1958 - 1963), covered in Chapter 8.

The French half, the AMX-30 has relied on extra - NATO sales for its export
success. The only other NATO army to procure the AMX-30 was the Greek Army.

The French were greatly assisted in this sales effort by the U.S. arms embargo
with Greece following the 'Colonels' coup d' etat of 1967. This sale was also
accompanied by the awarding of AMX-30 production sub-contracts to Greek industry.
56$tanley and Pearton , op. cit., pp. 118-119.

150

Chapter 11

57 1 bi d . , p. 119.

58j bi d .

59one firm that has continually played a large subcontracting role in this
regards is the fully nationalized firm, Aerospatiale.

SOnATQ Standardization and Licensing Pol i cy-Expl oratory phase, Vol . Ill: Supple-

ment, Hoagland, MacLachan &~Co~7~ subcontractor to General Research Corp.

November, 1976, p. 48.

51 1 1 must be remembered that Dassault's approach to aircraft development has
involved a concentration on performance parameters and physical characteristics
of moderate complexity, being mindful of carrying out new R&D only on an incre-
mental basis. As a consequence successive aircraft do not represent full genera-
tions (GRC/Hoagl and , MacLachan & Co., op. cit., p. 46).

62QRC/Hoagl and , Malachan & Co . , pp. 46-47.

63 1 bid., p. 47.

64ibid., pp. 47-48.

65See chapter 5.

6S$ee chapter 13.

67$ee chapter 8.

68"The Atar 9 turbojet powered the Mirage III and 5, the Mirage F.l and the
Mirage IV bomber. The engine was designed by the 'Atar group' (Atelier Aeronau-
tique de Rickenback) during the 50 ' s . The Atar group was made up originally
of a core of German scientists headed by the former technical chief of BMW,
Hermann Qestrich, and was later absorbed by SNECMA.

^Belgian Buy Spurs Mirage Sales" Aviation Week & Space Technology, Feb. 26,

1968, p. 16. '

70i bi d .

7 1 1 bi d .

73Edward H. Kolcum, "Europe Revises Strategic Planning Bases" Aviation Week &
Space Technology, March 9, 1970, p. 51.

73Belgian Buy Spurs Mirage Sales, op. cit., p. 17.

7^Edward H. Kolcum, "Europe Revises Strategic Planning Basis," Aviation Week &
Space Technology, March 9, 1970, p. 53.

75 Edward H. Kolcum, "Loan Approval Delay Caused U.S. to Lose Fighter Order,"
Aviation Week & Space Technology, April 13, 1970, p. 20.

76 1 bid.

77 Ibi d.

7§I bid .

79"Bel gi an Buy Spurs Mirage Sales," Aviation Week & Space Technology, February
26, 1968, p. 16.

^Stanley & Pearton, op. cit., p. 120.

81"Czech Invasion Bares NATO Atrophy," Aviation Week & Space Technology, March
10, 1969, p. 85. ~ '

151

Chapter 11

^Martel Ship - Launched Version Designed, Aviation Week & Space Technology,
September 7, 1970, p. 81.

83over 450 Olympus turbines had been sold as of mid-1980. Originally developed
in the 1950' s for the Vulcan bomber and later modified for the use on the
Concorde, its greatest use has been on ships and commercial power plants.

84john Marriott, NATO1 * 3 s 15 Nations , Oct/Nov. 1976, p. 82.

"Richard F. Coburn, "Swiss Aircraft Industry Declining," Aviation Week and
Space Technology, June 29, 1970, p. 51.

"Louis Kraar, "Everyone at Northrop is in Marketing," Fortune, April 10, 1978,
p. 54.

"Dan Morgan, "Acting as Middleman for Exports , Northrop Boosts Its Sales
Abroad," International Herald Tribune, July 7 , 1982.

"Kraar, op. cit.

"i bi d .

9C>Morgan , op. cit.

91 "Bel gi an Company Gets $8.5 Million for Machine Guns," Aerospace Daily, Septem-
ber 24, 1979, p. 1 01 A .

92Fabri que Nationale had originally expanded into the U.S. back in mi d- 1 97 7
when it took over the Utah based Browning Arms Co. At the time when FN was
involved in negotiations with the U.S. Army in 1975 over the Mag-58, Browning
and FN were both under investigation for having fudged in U.S. Customs Forms
on the value of .22 caliber Browning rifles that FN had been making under license
and shipping to Browning. The investigation had dragged on inconel usi vel y for
five years until the U.S. Army became interested in the Mag-58 contract. At
this point, FN decided to cooperate with Federal prosecutors and provide evidence
that was crucial in convicting John Val Browning, President of Browning. In
the words of one FN official, "we became more and more aware that our interests
were not identical with those of Browning." Mr. Browning, grandson of the
prestigious arms concern's founder, was indicted in 1976, and shortly afterward
resigned the Browning Arms presidency. The following year, the Belgian arms
manufacturer had not only won the U.S. Army contract, but bought Browning Arms
Co. for $20 million. (Tim Metz, "Browning Arms Got Shot Down and Taken Over,"

Wal 1 Street Journal , September 28, 1979, p . 18.)

93jeff Melvoin, "Court Blocks Army' s Purchase of Machine Guns from Belgium,"
American Metal Market/Metal worki ng News, July 12, 1976 , p. 7.

94Jeff Melvoin, "Maine, Maremont Challenge U.S. Arms Award to Belgians," Ameri-
can Metal Market/Metal worki ng News, May 24, 1976, p . 4.

95 1 bi d .

95Melvoin, "Court Blocks...," op. cit. p. 42.

97"Germany Wi ns a Battle," The Economist, February, 1978, p . 52.

98"Army to Adapt West German Gun for Use on Later XM- 1 Tanks," Aerospace Daily,
February 1, 1978, p. 162.

"Aero space Daily, December 6, 1977 .

100"Arm y to Adapt...," op. cit.

3- 01 1 bi d.

152

Chapter 11

102y he U.S. DoD also provided two other significant offsets linked (at least
explicitly by the Germans) to the NATO AWACS project. These involved the pur-
chase of German trucks and telecommunications equipment.
lOS^nny to Adapt...," op. cit.

1 04 1 bi d .

105"Epreve pour 1 e gouvernment beige," Le Monde (Selection Hebdomodai re ) , 1 e
22 fevrier, 1979, p. 1.

106"Belgium Plans Buy of Hawk Missile," Aviation Week & Space Technology,
February 5, 1979, p. 20.

1 07 1 bi d .
lOSjbid.

109intervi ews with H. Steve Tremper , Vice President, Boeing of Canada Limited,
between September and November, 1981.

H0$ee Chapter 5, sub-chapters A and D for more detail on this early history
of defense procurement within the Alliance.

l^A large percentage of this domestic procurement involved license production
of U.S. equipment for the Canadian Armed Forces, plus equipment provided to
the allies paid for by U.S. MAP.
l^Tremper , op. cit.

HO i bid.

H^The 1973-5 actuals cover January 1 to December 31, the 1976 involve only
the first six months, while 1977 and on cover, a period extending from July 1
of the preceding year to June 30 of the same year.
ll^Tremper, op. cit.

H^The Canadian CH- 113 and CH-113A, the Swedish HKP-4 1 s , the Japanese KV-107
and the USN and USMC CH-46's are all national variant's of the V- 107 family of
helicopters.

H^The Winnepeg subsidary of Boeing, with employment approaching the 1000 mark
in the early 80's, was originally established in the early 7 0 1 s as a result an
agreement linking it to the purchase of six 707' s by Canadai r .

USArnprior' s average employment for the mid-1980 to mid-1981 period was 306
persons with a payroll of $5 ,445,623. Approximately 50 percent of Boeing of
Canada, Arnprior Division, business is acquired from sources in the United
States .

l^Long-Term Canadian Supplier Relationship Program, Boeing Vertol Company,

July 1981 (Annual Report).

1 20" b ri ti s h Buying CH-47," Aviation Week & Space Technology, January 30, 1978,
p. 34.

121"raf*s New Chinooks Will "Fly Marconi", Military Technology, Issue 8, March/
April 1979, p. 32. "

122intervi ews with John Me Lean, Boeing Vertol ' s Manager for Inventory Manage-
ment, Traffic, Materiel Control and Division Offset, between September and
November, 1981. (Note: After years , the office was combined with several
others within Vertol Materiel.)

153

Chapter 11

123 1 bi d.

124j bi d .

125The original going- in position of the Spanish had been for a 30% guarantee
for work placed, not just requests for proposals issued.

126ihe offset agreement is covered in detail in clause sixteen of the contract.
127mc1 ean , op . ci t .

128ihe Italian M 1 1 3 license production program is covered in detail in Chapter 6.

129"yhe Netherlands: A Tank Contest Offers bill ion-doll ar prizes," Busi ness
Week, October 2, 1978, pp. 45-6.

130"[_eo pard 2," NATO's Fifteen Nations. April -May 1979, p . 88.

131C1 aus- Detl ef Lehmann, "An Industrial View of Armament Export and Collabora-
tion," NATO's Fifteen Nations, October/November , 1978, p. 70.

1 32 j bi d .

133canada participated in the drawing up of operational characteri sti cs and
specifications, and ultimately the selection of the Breguet 1150 design during
1957 and 1958 as the basis for joint development of a NATO standard Maritime
Patrol aircraft, designated the Atlantic. Canada, however, dropped out of the
NATO program at the end of 1958 to continue unilaterally with its own system,
the Argus, to fill its requirement.

134jhe Canadian Forces' Greenwood base in Nova Scotia will be the main point
of operations for the Aurora fleet, with 14 of Canada's 18 Auroras based there.
The main operations center, maintenance and aircrew training, and the data
i nterpretation and analysis center will be located at this facility. The
remaining four aircraft will be based at the Comox base in British Columbia.
(Jeffrey M. Lenorovitz, "Aurora for Canada Rolls Out on Time," Avi ation Week
& Space Technology, January 22 , 1979, p. 20. ) ~

135 Boeing has recently been more successful elsewhere in making in-roads into
the Lockheed monopoly in the area of maritime patrol aircraft. In mid- 1980
Boeing captured the Royal New Zealand Air Force contract worth $21 million for
the modernizing of its 5 aircraft force of Lockheed P-3B Orions. Be it on a
much more limited basis, the contract could be of considerable long-term signifi-
cance as other nations opt for modernization as opposed to replacing their
existing systems .

3- 3 6 1 n comparison, since the Dutch P-3C's (covered in Chapter 5 as part of the
Breguet Atlantic project history) were purchased through FMS , the offset is
covered in a letter of agreement between the Dutch government and Lockheed.

3 37 Barry Miller, "Canadian CP-140 Offset Sets Precedent," Aviation Week & Space
Techno! ogy , June 6, 1977, p. 149.

1 38 x bid .

139ibid.

140ibid., p .153 .

3 41 1 bi d .

3 42 1 bi d . , p. 152.

154

Chapter 11

143jeffrey M. Lenorovitz, "Aurora for Canada Rolls Out on Time," Avi ation Week
& Space Technology, January 22, 1979, p. 20.

144Mii 1 er , op . ci t . , p . 147 .

145 1 bi d. , pp 147-148.

146 i bi d . , p. 148.

1 47 Leno ro vi tz , op. c i t . , p. 20.

148^1 n er , op. cit . , p. 153.

149"CAE Simulator for Dutch P-3C ," NATO's Fifteen Nations, April/May 1982.
ISOibid.

151"a Fighter Contract Tied to Jobs," Business Week, September 12, 1977, p. 42.

152"Canada Being Offered Mix of Grumman F- 14 , GD F-16 Fighters," Aerospace
Dai 1 y , May 31 , 1978, p. 165.

l53"Qefense minister outlines seven- point offset policy," Aerospace Canada,
summer 1978, p. 16.

154a mix of Grumman F- 14s and General Dynamics F- 16s had been proposed to Canada
the previous May. A package combining F-14s and F-16s would have helped Canada
meet its requirements for air defense of a large continent and its responsibili-
ties to NATO to provide air to ground capability.

1 55 x n the final days before the announcement of the short list, the Canadian
press had reported that the Department of Industrial Trade & Commerce preferred
the F-18L because of a reportedly more generous Northrop package enabling Canada
to tap markets for aerospace and non-aerospace products.

156"panson Statement on Canadian Fighter Competition," Aerospace Daily, November
30, 1978, pp. 130-2.

157-fhe offers of 142 F-16 aircraft and 127 F-18A aircraft were based on the
assumption that waivers would be granted by the U.S. exempting the sales from
research and development recovery costs. Such exemptions can be granted only
in the interest of NATO standardization. The Canadian government pressed that
argument, as well as the contention that a better prepared Canadian air defense
would relieve the strain on U.S. Air Force responsibilities. (Alton K. March,
"Canadian Fighter Race Stiffens," Aviation Week & Space Technology, December
4, 1978, p. 16.) “ ” “

158"p-jght6r Competitors' Offsets Detailed," Aviation Week & Space Technology,
December 4, 1978, p. 16.

3- 59 1 bi d .

16Q"Canada Being Offered Mix of Grumman F-14, GD F-16 Fighters," Aerospace
Daily, May 31, 1978, p. 166.

161john Urquhart, "New Twist is Seen Probable in Contest to Provide Canada
with Fighter Planes," Wal 1 Street Journal , May 31, 1979, p. 12.

162"General Dynamics Lines Up Team for Canadian Fighter Program," Aerospace
Daily, October 17, 1979, p. 226.

l^Erv/i n J. Bui ban, "Canadian Fighter Spurs Offset Battle," Aviation Week &

Space Technology, November 26, 1979, p. 35.

164 j bi d .

155

Chapter 11

165 1 bid.

166ibid .

167 1 bid.., 36.

1 68 Bui ban , op . ci t .

169 1 bid.

170ibid.

172Morgan , op. ci t .

173 1 bid .

174 1 bid.

175 1 bi d .

1 7 6 1 bi d .

177 1 bi d .

17S»General Dynamics Lines Up Team ....," op cit.

17 9i bid , pp. 226-227.

180»McDonnel 1 Douglas is Sued by Northrop, its F18A Partner ,on Sale Bid to
Canada," Wal 1 Street Journal , October 30, 1979, p. 17.

181 1 bid.

1 82 1 bid .

183"Canadian F- 18 work agreed," Flight International, 15 December, 1979, p.

1988.

184"McDonnel 1 Accedes to Northrop on Canadian F- 18 Dispue," Defense/Space Daily,
December 6, 1979, page 162. . I

185"McDonnell Douglas Files F- 18 Counterclaims Agaisnt Northrop," Aerospace
Daily , January 4, 1980, page 19.

1 86 j bi d .

187 1 bid .

1 88 1 bi d.

189"u.S. Objects to Portion of McDonnell Douglas Offset Proposal to Canada,"

Aerospace Daily, November 20, 1979, page 102.

190noffset Controversy" Aviation Week & Space Technology, November 26, 1979,
page 34.

191"Canadian Fighter", Aviation Week & Space Technology, April 7, 1980, page
13.

192"Canada, Hornet Picked as NFA" , Defense & Foreign Affairs Daily, April 16,

1980.

1 93 1 bi d . , Also weighing in the Canadian decision were persistant press reports,
discounted by some defense analysts, concerning the alleged shortcomings of
the Pratt & Whitney F-100 engine in the F-16.

1 94 ibid.

195"Canadi an CF-18" , Interavia Air Letter, April 23, 1980, page 2.

196"Canada Expects U.S. Proposal Soon on Waiver of F- 18 R&D Costs ," Aerospace
Daily, July 10, 1980, page 49.

156

Chapter 11

197 1 bi d.

198 ibid.

199 ibid.

200 Ibid., page 50.

201"3rown , Lamontagne Conclude CF-18 Negotiations", Aerospace Daily, December
18, 1980, page 239.

202 1 bid.

203»Lehman Memo on Non-Recurring F/A-18 Cost", Aerospace Daily, January 26,

1982, p. 125.

204" i ndus t ri al Off-Set Figures for CF-18 Released," Aerospace Daily, March 5,
1981, p. 29.

205Back in 1978 Deputy Secretary of Defense Charles W . Duncan Jr., had issued
a memorandum that removed the Pentagon from any responsi bi 1 i ty for regulating
offset agreements.

206Michael R. Gordon, "Pentagon, Contractors Divided Over Foreign Arms Co-
Production Deals," National Journal , 2/20/82, p. 331.

2 07 ibid.

208To say nothing of the markedly deteri orati ng state of France and Spain's
relations since the late 7 0 1 s over agricultural policies and Spanish entry to
the E . E.C .

2 09^s pa gne : Plutot que des Mirage 2000, Le Government Decide D'Acheter 84
Chasseurs Ameri cains F-18," Le Monde, 26 juillet, 1982, p.3.

210"$pain Delays Proceedings in F-18 Purchase," Aviation Week & Space Techno-
logy, August 30, 1982, p . 22 .

^Morgan , op. ci t.

212 1 bid .

2 1 3 1 b i d .

214i bi d .

21 5 1 bi d

21 6 1 bi d .

217"Athenes veut acheter a la France des avions Mirage-2000 et des missiles
anti-aeri ens ," Le Monde (hebdomadai re) , April 22-28, 1982, p.5.

218Aero space Daily, "Greece Steps Up Search for New Fighter," March 5, 1982,
p . 35 .

219"Panavi a Offers Greeks Offsets on Tornado," Aviation Week & Space Technology,
May 10, 982, p. 20.

220The Greek Socialists have also reopened the low altitude air defense missile
competition after a Swiss-Ameri can Contra vez-Raytheon hybrid system had been
selected the previous year over the French Crotale, Franco-German 'Roland, and
Raytheon's Landsparrow derivative of the NATO Seasparrow system.

221"Panavi a Offers...," op. cit.

222 1 bi d .

223 1 bi d.

157

Chapter 11

225xbid.

226/\the nes veut acheter . . . ," op. cit.

227 x bi d .

2 2 8 j bi d .

229"panav-j a proposes Greek Fighter Offsets," Aviation Wee’k & Space Technology,
October 11 , 1982 p. 22. " ~

230xbi d.

231 i bid .
2 32 x bi d.

233"La France a la recherche d'un systeme de detection aeroporte:
Hawkeye de Grumman est une solution possible; il y en a d'antres,
28 November, 1981, p.33.

234 x bid.

235 1 bid.

L ' E-2C

"Ai r et Cosmos ,

236"Boeing Offers CFM-56-Equi pped AWACS to France," Aerospace Daily, August 2,
1982, p. 171.

237 1 bi d .

238 x bi d .

23 9 1 bid.

158

Chapter 11

Chapter 12

MODE #7 - TRANSATLANTIC JOINT PRODUCTION
AND/OR SYSTEMS INTEGRATION BY A U.S. LED INDUSTRIAL TEAM
(i.e. , INVOLVING NO JOINT DEVELOPMENT)

I. INTRODUCTION

For comparative purposes this Mode of industrial collaboration can be viewed
from 2 vantage points. In one sense it is an expansion of Mode #6, in being
multi-lateral instead of bi-lateral in nature. In another sense it is a con-
traction of Mode #5 of industrial collaboration in that Mode #5 included U.S.
led transatlantic joint production efforts, though significant joint develop-
ment as well. These U.S. led joint production and/or systems integration
industrial teams included in Mode #7 involve little or no joint development,
and are for systems being purchased by government consortia following an
international competition. In all these cases except the HELIP project, the
U.S. government was a participant in the purchasing consortia. This Mode
first appeared in 1958 within the framework of the NATO Infrastructure Program
and expanded to weapon systems in the mid-70's with the HELIP, the F-16, and
later the NATO AWACS projects. Virtually all projects in this Mode have been
linked to some extent to some sort of external offset, as well.

In each case, both the NATO Infrastructure Program projects and the three
weapon system projects, the U.S. lead industrial team was selected following a
competition. In the case of the three weapon system projects, reaching con-
census on source selection was possible because no feasible alternative to the
U.S. system was available within the selecting European nations.

Chapter 12
1-1

FOXC/Disk 8/ Ch. 12, pg. 1-1 - 1-4

1. C3 and Early Warninq/Air Defense Projects funded through

the NATO Infrastructure Program

With the NATO Infrastructure Program, as with all other areas of collaboration
in defense procurement there is the concern for 'juste retour', one involving
a balancing of military requirements and economic benefits for something that
is a 'public good'. Besides this though, for the NATO Infrastructure Program
there has also been the consideration of ability to pay, one that is no longer
a consideration in the area of weapon systems except for the three developing
nations of the Alliance: Greece, Portugal, and Turkey. For NATO Infrastruc-
ture these concerns can generally be offset through the advantages concommit-
ant with the geographic distribution factor relevant to brick and mortar
projects (e.g., local architectural and construction firms), being further
balanced by the- international competitive bidding (ICB) procedures for NATO
Infractructure projects (NATO Document D/2611). But for the 1/3 of the con-
tracts where high technology is involved, and especially the larger projects
at that, the need to offset another unquantif iable factor, technology, is
introduced. Therefore with the larger high technology projects represented by
the NATO Air Defense Ground Environment (NADGE), the component projects of the
NATO Integrated Communications system (NICS) such as the SATCOM ground and
space segments, the need to offset technology often requires project specific
internal offsets, as well as some external offsets.

The NADGE program required work sharing amounting to 98% of each nation's con-
tribution, and therefore offset almost totally on an internal basis, each
nation's financial contribution. Whereas the NICS is a multi-project program
involving well over a billion dollars in contracts, in which globally the U.S.

Chapter 12
1-2

FOXC/Disk 8/ Ch. 12, pg. 1-1 - 1-4

is guaranteed a 38% share of the business, another 20% is up for grabs and the
remaining 42% is guaranteed to the other nations in proportion to their con-
tributions. For one of the NICS projects, the $80 million SATCOM III ground
segment contract in June 1978, Ford Aerospace was required to lay off 37% of
the work to the industries of the three largest contributing nations after the
U.S.: the FRG, Italy, and the U.K.

2. Weapon Systems

The HELIP program involved a major up-grading through modification of a U.S.
system, the Hawk surface-to-air missile, previously produced in Europe under
license. This was basically a result of the customer governments having
approached the project with greater cost consciousness (and previous exper-
iences with a multi-national production consortium) combined with the FRG's
decision to use its share in the program to offset U.S. troop costs. The F- 16
consortium involved the replacement aircraft for the F-104 by a group of
smaller European nations that had previously opted out of a joint development
effort, the MRCA Tornado, while not being interested simply in assembly of a
foreign system under license, i.e., the quantity ordered could not justify
full scale license production in Europe (only assembly with limited manu-
facturing of components).

A distinguishing characteristic of this Mode from Mode #6, one that is part
and parcel of the expansion to a multi-lateral basis, is that the customer
became much more complex, with the buying nations assuming an active role in
project management. Either a NATO Production and Logistics Organization

Chapter 12
1-3

FOXC/Disk 8/ Ch. 12, pg. 1-1 - 1-4

( NPLO) was set up, or a Steering Committee was, with the latter accompanied by
multi-national staffing of a U.S. SPO. In this sense it is not just another
sale to a foreign government with industrial offsets being passed to the
government's industry (Mode #6), but an actual project, one in which project
management and the whole contracting process is impacted by the increased
leverage and participant status of the customer governments. This difference
is also reflected in the way the lead U.S. firm manages the integrated subcon-
tract management effort (and in this sense it is similar to Mode #5 projects,
NATO Sea Sparrow in particular). Another factor further complicating the
effort is the inevitable fluidity of the set of governmental /industrial
participants, along with the linkage (at least on the European end) to some
sort of U.S. government provided external offset.

There is a case for treating the NATO AWACS project as a parallel off-shoot of
the quaswlliance-wide NATO infrastructure program (the author's original
approach), since the previous generation Early Warning/Command and Control
systems were funded through this program (and it was briefly considered early-
on for NATO AWACS). However, the NATO AWACS project is placed here in Chapter
12 with the other two weapon system projects, not in Chapter 3 with the other

C /I projects funded through the NATO Infrastructure Program and falling into
this Mode of industrial collaboration. The facts are that: the NATO AWACS/
Command and Control system does not primarily involve fixed facilities, but an
airborne platform; for a number of reasons the NATO Infrastructure Program's
co-funding formula could not be applied; and one of the key funding nations
among the 13 regular NATO Infrastructure Program participants dropped out two
years into the final stage of planning for the program.

Chapter 12
1-4

FOXC/Disk 8/ Ch. 12, pg. 1-1 - 1-4

A. HELIP (THE EUROPEAN IMPROVED HAWK PROGRAM)

In January, 1974, Raytheon received the prime contract from the Paris based
NATO Hawk Production and Logistics Organization (NHPLO)^, to lead an interna-
tional industrial consortium for the $750 million Hawk European Limited
Improvement Program (HELIP). HELIP was the independent European equivalent of
the U.S. Improved Hawk program. The name. Hawk European Limited Improvement
Program, is a relic of the original goal of incorporating European technology
into what was to be an independent European improvement program. This, how-
ever, as we will see shortly, never worked out.

Raytheon's share of the work as prime contractor, was $400 million, with firms

from Italy, Netherlands, France, and the FRG obtaining some $260 million in

contracts. The NHPLO Placed another $90 million contract with Hazeltine Corp.

for AN/TPX-46 IFF equipment to tie the European systems in with those of the

U.S. stations in Europe, a contract with Applied Devices Corp. for conversion

kits to update the AN/TPQ-21 simulator to an improved AN/TPQ-29 simulator, and

the U.S. government received contracts for GFE and quality assurance services

on work performed in the U.S.

1. The U.S. Army's Improved Hawk Surf ace-to-Air Missile System
The history of HELIP goes back some 10 years from this contract award (i.e.,
ignoring the NATO Hawk program dating from 1958), to 1964, when R&D was initi-
ated for an Improved Hawk program--the U.S., Army having decided that the Basic
Hawk was to be upgraded so as to prolong its effectiveness. The Improved Hawk
configuration was defined in 1966, and in 1969 the industrial prototype was

Chapter 12
A-l

Improved Hawk Missile Source: Raytheon

completed. The new system involved improvements in electronic-counter meas-
ures ( ECM) , reaction time, lethality and its ability to cope with the higher
speed and greater maneuvering capabilities of newer aircraft. This involved a
totally new missile, and modifications to the Ground Support Equipment plus
the incorporation of a new item, the information and coordination central. By
December 1971, after extensive testing, the system was ready for production.

In August 1972, the system was ready for deployment, with Initial Operational

Capability occuring three months later.

The Improved Hawk missile system detects, identifies, tracks and destroys air-
borne targets. The Improved Hawk missile uses a semi-active homing type of
guidance system in which the RF transmitter is ground based and the receiver
is in the missile. The missile has a range in excess of 35 km. and can reach
altitudes of greater than 15 km.

A U.S. Army Improved Hawk Battalion is organized with a headquarters and one
headquarters battery, plus four firing batteries. A battery consists of the
following Ground Support Equipment:

The improved continuous-wave acquisition radar (ICWAR) which provides
low-to-medium altitude target detection, while the improved pulse acqui-
sition radar (IPAR) is used to provide medium to high altitude detection
coverage.

The information and coordination central (ICC) functions as the battery
fire control data processing and operational communications center. The

Chapter 12
A-2

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ICC contains: an automatic data processor (ADR) for input from the bat-
tery radars; a Mark XII AN /TP X -46 identification, friend or foe (IFF)
system; and communication equipment.

The improved battery control center (IBCC) is the fire control center for
the Improved Hawk battery. It contains the equipment required for remote
control and operation of the radars, and for missile firing. It is oper-
ated by a crew of four and a tactical control officer (TCO). The IBCC
has displays and indicators that are used during an engagement to detect,
identify, evaluate, assign, and fire upon targets.

The improved platoon command post (IPCP) is used to monitor and control
firing operations of a battery’s improved assault fire unit (IAFU). The
IPCP houses a tactical display and engagement control console (TDECC) , an
IFF interrogator set, tactical communications equipment, an AM/GSA-77,
and a modified ADP.

The improved high-powered illuminator radar (IHIPIR) is the tracking
radar of the battery. A continuous-wave radar, it uses the doppler
principle to lock on and track assigned targets. Each battery has two
IHIPIR' s, which operate independently of each other to allow two targets
to be tracked and engaged simultaneously. Each IHIPIR is connected by
cable to the IBCC and, through a launching section control box, to three
launchers in the firing section. During an engagement the IHIPIR sup-
plies target data to the IBCC, ICC, launcher, and missile.

Chapter 12
A-3

Data cable 114,3 asters

Data cable 10.6? meters (between ICC and IBCC)
Data cable 10.6? meters (between ICC and IBCC)
Power cable 114. 3 meters

Improved Hawk mobile battery cable layout

I improved pulse acquisition radar

IFF antenna,

The improved range-only radar (IROR) is a pulse-type radar that provides
target video to the IBCC to allow an operator to set range for a jammed
IHIPIR when necessary.

The improved launcher (ILCHR) has three basic purposes: to aim the mis-
siles, to send prelaunch commands to the missile, and to send data to the
IBCC. During an engagement, after fire, the launcher activates, slaves
to, and tracks with the IHIPIR, accepts lead angle positioning informa-
tion from the IHIPIR to aim the missile at a predicted kill point, and
launches the missile. The launcher may be positioned throughout 6,400
mils in azimuth and may be raised and lowered in elevation.

Other elements of the system include the electric power generators (6 per
battery!, the improved launching section control box (which distributes sig-
nals between the IHIPIR, IBCC and ICC), the loader transporter (3 per bat-
tery), and off course the missile itself (3 per launcher, with 3 launchers per
battery) .

2. The NATO-Europe Program Is Launched
As for the European response to the U.S. Improvement Program, the five parti-
cipating governments (PG's) of the NATO Hawk Program (France, the FRG, Nether-
lands, Belgium, and Italy, jointly producing the USA/Raytheon (Basic) Hawk
under license) started the exploratory phase for a new follow-up program in

November, 1967. The Improved Hawk's receiving the designation of HELIP in
Europe was a result of the initial concept being one of enhancing program

Chapter 12
A-4

support among the 5 PG's by finding ways for their contributing to the R&D
effort for the new program. Although this never occurred — the attempt to
introduce into the Improved Hawk a European developed low altitude acquisition
system was eventually dropoed--the name of HELIP remained, even though HELIP
System and the U.S. Improved Hawk were to have identical configurations
(though the Eurooean configuration lagged behind over time).

Actually, suggestions for improvement of the NATO Hawk were preferred by
several of the program's five National Prime Contractors (NPC's),4 and their
subcontractors as early as 1963. Yet, due to preoccupation at this time with
production problems, a very thin technical staff, and an unwillingness to use
the program's French ( i . e . , Thomson-Houston) dominated Technical Documentation
Center for development work, such improvement proposals received little sup-
port from the European Prime Contractor, Societe Europeene de Teleguidage
(SETEL)t" With some of Europe's best engineers working on the system the pres-
sure built up, however, and in the summer of 1964, SETEL submitted to the
NHPLO's Management Office (NHMO) a proposal for a development program aimed at
a major improvement in performance. The low-key effort reflected only a col-
lection of individual proposals from the NPC's, not an integrated systems

proposal, and the matter was again dropped.

When the matter came up again in 1966 for improvement of the NATO Hawk System,
it was the NHMO that initiated a new study to determine what U.S. improvements
might be incorporated into the NATO Hawk. The result of the study was a
recommendation by the NHMO to the BOD of the NHPLO, that a Hawk European
Limited Improvement Program (HELIP) be inaugurated for the system.

Chapter 12
A-5

Beginning in 1967, the NHPLO conducted tests over a 2-year period involving
five configurations from four European countries. During the second year of
testing the U.S. configuration was included, being ultimately the one chosen.
On this point Raytheon's Hawk Drogram Manager, Eric Levi, felt that the deci-
sion was not only influenced by technical, but also, to some degree, by Stand-
ardization considerations of reducing logistics support costs. During this
initial phase, which came to an end in 1970, European Industry had been col-
lecting technical, operational, industrial and financial data on the program.
During the same period HELIP suffered considerable del ays stemming from the
difficulty of aligning the national military requirements, as well as the
usual economic and industrial considerations of the PG's.^

Meanwhile, the U.S. government and the NHPLO had reached an agreement in 1968
that if the Improved Hawk was produced for NATO (meaning in this case some
combination among the seven European PG's - the original five, plus the two
U.S. grant aid recipients, Greece and Denmark), the U.S. would grant the pro-
duction rights, as it did previously with the Basic Hawk. However, unlike the
previous program, the U.S. government this time required the payment of a por-
tion of the nonrecurring R&D costs. Due to the U.S. program's still being in
the R&D stage, the licensing agreement covered R&D Technical Data Package
(TDP) and associated know-how immedi-ately, with provisos for the prototype
production TDP and know-how as a follow-on, and the production TDP and know-
how in the case of a production decision being
made.^

Chapter 12
A-6

In addition, the Raytheon license would not be with the European industrial
consortium's SETEL, as previously. Instead it would be with the NATO subsidi-
ary agency, the NHPLO, which, unlike its industrial counter-part, was to sur-
vive the initial program. The contractual authority of the NHPLO (which had
been blocked by France during the 1958-60 negotiations for the NATO Hawk Pro-
gram) had since been recognized.

3 . The Selection of a Prime Contractor
a. The First Request for Proposals

In 1970, SETEL, which had previously been designated to submit a program plan
proposal on a sole source basis, had its proposal rejected. Levi felt that
this stemmed partially from considerations of cost, and partially from a more
general disenchantment with utilizing a consortium-type European Prime Con-
tractor, as with the earlier NATO Hawk program. He felt that the reason the
NHPLO did not repeat the aporoach followed during NATO Hawk at the industrial
level, was due to SETEL 1 s having created the image of it not being the master
of its own fate, but more of a servant of the 5 National Prime Contractors
(NPC'sl.9

As an outgrowth of the NATO Hawk experience, this time around the government
consortium, the NHPLO, reached agreement that there would be a prime contrac-
tor consisting of a single firm fully responsible for all aspects of the pro-
gram, instead of creating an inter-firm company specifically for the project.

Moreover, whereas the contract for the NATO (Basic) Hawk had been a cost reim-
bursement type contract, greater emphasis on cost/effectiveness than in the

Chapter 12
A-7

previous program (which had been heavily weighted toward maximizing technology
transfer to all five NPC's), led to the use of a firm fixed price contract for
HELIP .

Consequently, in 1971 the NHPLO made a request for competitive program plan
proposals from the individual European firms which, naturally enough, were to
be the original NPC's, those of the three national governments having chosen
to participate by this time, the FRG, Italy, and the Netherlands .

b . The Second Request for Proposals

Subsequent to this, the three NPC's of the previous program that were to rep-
resent the participating countries at the industrial level— AEG-Telef unken.
Philips, and Selenia— decided not to procede individually but to form a new
consortium with AEG-Telef unken acting as prime contractor. Simultaneously the
NHPLO borrowed an Improved Hawk industrial prototype battery from the U.S.
government in order to conduct independent testing and convince the govern-
ments of the advantages of adopting an Improved Hawk/HELIP system. Immedi-
ately thereafter, as the AEG-Telefunken led team was the only bidder, the
NHPLO asked Raytheon to submit a competitive proposal. Levi felt, at the
time, that the Raytheon and AEG-Telefunken proposals were not really compara-
ble, because the Raytheon proposal, submitted in 1972, was restricted to the
production of hardware only, on the already existing U.S. production line,
whereas the AEG-Telefunken proposal included the setting up of a new produc-
tion program. Also in 1972, one of the MAP recipients of the U.S. share of
NATO Hawk production, Greece, joined the NHPLO and decided to participate in
HELIP, bring-ing the number of participating nations up to four . ^

Chapter 12
A-8

Procuring Participating

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The Third Request for Proposals

With the difference of scope mentioned above in mind, the NHPLO decided to
request another round of bidding, based on a common scope. Raytheon and the
AEG-Telefunken headed team resubmitted their proposals in February 1973, this
time both bidding on the total scope of the work. The Raytheon proposal
involved all production still being performed in the U.S., with the participa-
tion of European firms limited to the overhauling of NATO Hawk Ground Support
Equipment. Naturally, these proposals could not be competitive on a strictly
cost basis, with a U.S. production line already in existence. Additionally,
Levi was still not all that certain of Raytheon's status as a serious con-
tender.^ Not only on a purely cost basis was U.S. production cheaper, but 2
days after Raytheon submitted its proposal, the U.S. dollar was effectively
devalued (with the final collapse of the Smithsonian patch-up of the Bretton
Woods international monetary system). To further alter the scenario, the FRG,
with its-50% of total Drogram participation at that time, decided that its
nortion was to be considered as part of the U.S. -FRG offset agreement for U.S.

troops stationed in the FRG— which is to say, some 50% of HELIP work would now

have to be done in the U.S.

d. The Fourth Request for Proposals (and A Last Minute Revision)

With this drastic altering of the ground rules, AEG-Telefunken dropped out of
the program, while Raytheon was asked in June, 1973, to submit a new proposal.
So the fourth round began. Raytheon's third proposal was submitted in
September of the same year. The new ground rules and guide-lines for this
proposal involved the following points:

Chapter 12
A-9

NATO Hawk Production and Improvement Programs

1-U2ZS*

50% U.S. production, and competitive solicitation for subcontracts from
all the European participating nations, with Italy being particularly
adamant in demanding industrial participation equal to -its share of the
cost;

the prime contractor was to have maximum responsibility;

the price was to be the lowest possible, with the U.S. product price as
the goal (working from an FMS or ice quote);

it was to be a firm fixed price contract without escalation for the pro-
duction portion, and the contract would not contain provisions for

exchange rate changes.

In November, two months after the submission of the third Raytheon proposal,
France reversed its previous position and decided to join HELIP, if certain
BOP and technical needs were met. France formally entered the program in
January, 1974, and brought the number of national participants up to five. As
a result, Raytheon had to submit a revised proposal, so as to include at least
minor French industrial participation.

With Raytheon being the sole bidder in the final round, as emphasized by Levi,
there was between Raytheon and the NHPIO, "a price negotiation, and a very
difficult one" at that. ^

Chapter 12
A-10

4. The NATQ-Raytheon Prime Contract

Raytheon was awarded the oreliminary contract in January* 1974, receiving the
final contract several months later, in May. When the NHPLO reached agreement
with Raytheon officials, it was on the last day before a several percent rate
increase was scheduled to be put into effect by Raytheon and the other Hawk
contractors.^

Immediately subsequent to the launching of the program, Denmark (the other
U.S. MAP recipient of NATO Hawkl joined as the sixth participant. Belgium
retained an option to join before February 1, 1974, but did not exercise it,
thus beinq the only NATO nation with the older Hawk system not to replace it
with the Improved Hawk. Negotiations over its participation dragged on inter-
nationally as well as continuing to be a major political issue domestically
until its resolution in January, 1979. NATO faced, in the 5-year interim,
the prospect of a 60 km gap in the German - Dutch - Belgium - U.S. Hawk belt
stretching across the FRG from North to South.

Greater cost consciousness in the case of HEIIP, as compared to the prior NATO
(Basic) Hawk program, was primarily the result of:

the U.S. -FRG offset agreement's shifting the majority of the work outside
the procuring nations;

the general evolution of defense contracting concepts between the late

50 ' s and the mid-70 1 s;

Chapter 12
A- 1 1

the different priorities of the two periods, the technology transfer
involved in the original missile system program no longer being the par-
amount concern. This time it was cost and schedule.

Due to these reasons not only was the U.S. contractor selected as the prime,
but, instead of sole reliance on cost reimbursement, a mix of four contract
types were used:

firm fixed price (FFP) for production;

firm fixed price escalatable for overhaul and conversion;

firm fixed price rate for the technical assistance, and certain manpower
related portions, and;

cost reimbursable for certain overhaul related materials.

The firm fixed price contract for production without escalation provisions was

unusual in the European environment, where typically, contracts over 2 years

duration have labor escalation clauses.

Before contract negotiations, Raytheon and the European firms involved, opened

their books to whatever data the NHPLO and the PG's wanted to know vis-a-vis

their proposals. There were also to be post-award audits on the non-firm

fixed price portion of the contract. The normal NATO practice was followed

in carrying out these audits, utilizing both the NHPLO' s and the given

national government's experts, with heavy reliance on the latter.

Chapter 12
A- 12

PHi.

Improved Hawk Missile

Source;

(

Raytheon

Along the same lines, the NHPLO delegated the quality assurance function to
the national government- surveillance services, while maintaining an active
role at the program management level.

The NHPLO also had instructed Raytheon that the contract could not contain

provisions for exchange rate fluctuations. Instead Raytheon and each supplier

projected their costs in the currencies involved, and were paid accordingly in

a 'basket of currencies'. Therefore, the contractors are fully insulated from

exchange rate fluctuations, and the governments pay in a basket of currencies

which dampens the amplitude of cost fluctuation, thus reducing their individ-

ual risks of foreign exchange losses.

Each of NATO's subsidiary civil agencies, or NATO Production and Logistics
Organizations (NPLO's) as their formally called, are basically on their own
when it-comes to the mechanisms of procurement, ( i . e . , no single national set
of defense procurement regulations are automatically resorted to, while NATO
has none). The NHPLO originally insisted on applying the terms and condi-
tions of the General Administrative Clauses and Conditions (GACC) which are
in wide use throughout Western Europe, to its contract with Raytheon and all
other participating firms. These were the same boiler plate procurement reg-
ulations utilized for the previous NATO (Basic) Hawk project with prime con-
tractor SETEL. Raytheon, however, refused to accept them for HELIP, taking
the position that they were not well suited for this type of program (nor
very artfully drafted for that matter). In the end, for the final NHPLO-
Raytheon contract, Raytheon's proposed commercial terms and conditions
finally prevailed for the most part. Chief among the several GACC clauses

Chapter 12
A- 13

accepted were the termination provisions. Raytheon's legal consul during the

negotiations, Howard Hensleigh, pointed out that the termination clause was

accepted because it provided compensation for anticipatory profits in case of

termination for convenience.

The GACC, however, were adopted wholesale for the contracts with the European

suppliers. Though Hensleigh was concerned at the time that this mix might

eventually be the subject of a dispute, no problems ever arose.

In addition to the GACC (covering boiler plate terms and conditions) the
General Technical and Industrial Rules (GTIR) were also important. The GTIR
define the technical requirements to which the European subcontractors work,
such as quality assurance systems and final acceptance testing.

RaytheofHs NATO Program Manager for the U.S. , Bill Mahoney emphasized that a
U.S. prime contractor operating in the European environment should be very
familiar with both the GTIR and GACC. "For example, regarding the GACC, the
contractor must know enough to ask for something initially, otherwise the sub-
contractor will later call it extra-scope, and with regards to the GTIR, a

U.S. prime must have an idea of what an inspector would be looking for."

In any event, the inter-mix of European and U.S. approaches was one of the
factors contributing to the decision to have the NHFLO as signatory for all
the contracts with Raytheon's European suppliers." The wide acceptance of the

Chapter 12
A-14

HELIP (EUROPEAN IMPROVED HAWK)

THE

GACC and GTIR in Western Europe and its adoption for HELIP made contracting
with European suppliers much easier for Raytheon, substantially reducing the
scope of those points ooen for negotiation. Only the fundamentals such as

price, warranty, delivery, and payment provisions needed to be negotiated.

According to Levi, the reasoning behind this unusual contracting relationship
was, "the European contract format and structure had evolved over a long
period of time, along lines that provided some comfort between the two par-
ties... there being many terms and conditions in the general administrative
clauses that we couldn't cope with properly, as a contractor to us. In the
interest of consistency, however, at least in a European environment, there
was nothing wrong with those contracts being signed directly with the
NHPLO."26

One additional point (and one which was to be an issue for the NATO AWACS pro-

qram later in the 70's,l involved protection against third party liability.

Instead of indemnification by the purchasing governments (either collectively

through the NHPLO, or each national government for its own industry), Raytheon

and its European and U.S. subcontractors priced for and obtained commercial

insurance. Though indemnification was not resorted to (as it was on NATO

AWACS), Hensleigh, sa^'d Raytheon would have had no problem accepting an

NPLO's commitment to indemnify the contractor. Once the BOD members had

agreed and signed, their nations would be fully committed.

Chapter 12
A-15

Greece

European Limited

5 . Organization of the Industrial Effort
Having overall Drogram management responsibility for coordinating the European
industrial effort for HELIP, Raytheon set up two wholly-owned subsidiaries
several kilometers from where the NHMO is located in Reuil Malmaison just west
of Paris . First the Raytheon European Management Systems Company (REMSCO)
was established, and then a subsidiary of REMSCO, the Raytheon Technical and
Administrative Services (RAYTAS) was set up in St. Cloud. REMSCO was only a
shell, while RAYTAS provided program management, including a staff of some 100
people between 1975-1979. RAYTAS staffing tapered off during 1979 and 1980
(when it was finally closed down). Raytheon-U.S. supported RAYTAS for the
project (e.g. RAYTAS placed orders for hardware and services with Raytheon-
IJ.S.). In addition to the St. Cloud based staff there were permanent Raytheon
technical representatives in vertual 1 v all the European supplier plants.

The European firms contracted directly with the NHPLO, not with Raytheon.

Legally speaking there were only two parties to each of the contracts, NATO

and the individual European suppliers. Nevertheless, Raytheon maintained

responsibility for total program performance, with the European firms having

been responsible to Raytheon as if in a normal subcontractor relationship.

The NATO agency contracted with the European suppliers in such a way, as to

allow Raytheon to maintain sufficient control. Signature routing for the

NHPLO-European industry contracts and invoices were routed up through RAYTAS

management, allowing Raytheon the right to veto payments from the NHPLO to the

European contractors. The NHPLO' s NHMO General Manager actually signed the
28

contract . In short, although the NHMO had the formal contractual responsi-
bility, subcontractor interface was the sole responsibi 1 ity of RAYTAS. This
contractual arrangement is represented by the figure on the following page.

Chapter 12
A-16

Raytheon chose the 22 European firms that were solicited to quote for the pro-
duction, and overhaul and conversion aspects of the program. Among these how-
ever, Raytheon did not always have the ultimate choice on which firm was to be
selected, since as is typical with NATO programs, there was simultaneously a
continual balancing of funding, technology, and production being negotiated at
the inter-governmental level within the NHPLO. Although both Raytheon and the
NHPLO participated in the negotiations with the European firms (the NHPLO
being involved especially in those negotiations covering overhaul and conver-
sion), the scope or work for each firm, the content, and detailed require-
ments, were generated by Raytheon. The contracts had to be acceptable to

Raytheon first, and then would be officially ratified by the NHPLO.

The production program was partitioned as follows between the two sides of the
Atlantic:

Raytheon reserved missile guidance and control production to the U.S.,
since the missile was the most critical item vis-a-vis reliance and
perf ormance.

To the Europeans would be allocated missile assembly, and part of missile
production. All the Ground Support Equipment (GSE) production, and the

overhaul and conversion of older GSE was also to be accomplished in

C 30

Europe.

National work and funding shares for HELIP did not strictly adhere to the
principles of 'juste retour ' —except for Italy. As of the 1974 contract award,

•31

the shares were as follows:

Chapter 12
A- 17

Work %

Funding,
Order t

U.S.

60.7%

Italy

25.3%

22%

Netherlands

7.2%

14%

France

3.9%

14%

FRG

2.9%

40%

Denmark

Greece

The final Raytheon-European supplier contract structure was not defined until
the last of the four proposals and after the final repartition requirements
were known and negotiated among the six participating governments. As is evi-
dent from the above work spread, Italian industry obtained almost 2/3 of the
original work package placed in Europe, with the Dutch, French and Germans
sharing the balance. Most nf the later Belgian off-set had to be external to
the program, as one might expect.

Moreover, there was not a very high correlation between the work performed for
HELIP by the individual European suppliers, and that which had been performed
during production and follow-on support for the NATO (Basic) Hawk system. The
drastically altered repartition requirements, in addition to the capabilities
of the firms, determined the work allocation for HELIP.

This time around the Danish and Greek governments paid for their own systems
(and not the U.S. through MAP), but their industries share of the work was
once again zero. Even though Raytheon did solicit bids from them:

Chapter 12
A-18

-MES (Italy) - missile safety and arming devices, plus some mechan-

i terns, all for the missile;

S1GME (Italy) - major part of missile assembly;

FIAR (Italy) - I HI P I radar, IGWA radar, launcher, organization
(OME) and field (FME) maintenance equipment kits;

French Army exercises, October 1982,
with a Roland Short-Range Air Defense
(Shorad) missile system, with
elements of an Improved Hawk battery
visible in the background
(Illuminator Radar, Information and
Coordination Central, launcher and
mi ssiles)

Source: Air & Cosmos

-Aerital i a ( Italy) -CCDB;

' -AEG-Telefunken ( FRG)-improved platoon command post (IPCP);

Overhaul and conversion of old Ground Support Equipment;

North line

-AEG-Telefunken (FRG)-IHIPI radar;

-Thomson-CSF (France) - IHIPI radar (subcontracted from
Telefunken)^

-Fokker (Netherlands) - ICWA radar, launcher, loader, FME 5;
-Hollandse Siqnaal aoparaten (Netherlands) - I PA radar, launcher,
loader, FME 5;

Southline

— -0T0 Melara (Italy) - loader;

-FIAR (Italy) - ICWA radar, IHIPI radar, launcher, OME, FME;
-Selenia ( Italy) - battery control center, IPA radar, IRO radar,
and SICO.

For the production side of the European work there was little duplication
within Europe, except in the case of the rocket motors, missile assembly and
IPCP. For overhaul and conversion, however there were two lines. One was
located in the north for the German, Dutch, French, and Danish systems; and
the other in the south (Italy) for the Italian and Greek systems. Excluding
the work that fell to the Europeans after the belated January 1979 Belgium
decision to procure the Improved Hawk, all Ground Support Equipment was

Chapter 12
A-20

delivered by the end of 1978. European missile production was completed by

the spring of 1980.

6. The Unique Subcontracting Arrangements
Though appearing to have been a systems manager for HELIP with the job of mon-
itoring other contractors providing GFP, the job of RAYTAS was actually that
of a standard prime contractor. Even. though the formal contractual relation-
ship was not that of a prime/sub relationship, the job was functionally and

responsibility-wise very similar to that of a standard prime contractor/

This NHPLO - European industry relationship had benefited from a history of

working together since the late 1950's. The NHPLO provides one of the few

examples of a multi-project scope for an NPIO, one that can benefit from a
well defined contracting authority-contractor interface; one of the key insti-
tutional-problems faced in NATO projects.

Since the project by project approach usually means setting up new institu-
tional arrangements for each project, working relationships start from scratch
practically every time. This means forfeiting for future projects much of the
accumulated background knowledge and mutual accommodation of past ones. With
each new project, the rebuilding and relearning process must begin again.

As for HELIP, once the NATO Hawk system was in the field (circa 1964), for
follow-on work the NHPLO began to circumvent SETEL, the European prime con-
tractor for the project with whom it had developed an unsatisfactory relation-
ship, and went directly to its component firms. This breakdown of the work

Chapter 12
A— 21

meant that the one SETEl-MHPLO relationship was replaced by the multifirm-
NHPLO relationships that had been around for a decade by the time HELIP
finally took off.

Therefore, one can see why Raytheon would feel comfortable with a prime-sub-
contractor relationship such as this, one which at first glance would appear
rather bizarre, to say the least.

It was in the area of overhaul and conversion that Raytheon really drew on the
NHPLO and its well defined interface with the subcontractors. As one example,
Raytheon's European subs were comfortable with granting the NHPLO a much more
liberal warranty than any U.S. firm would. For another, there was no way that
Raytheon could have quoted a firm-fixed price for any part of a given overhaul
task, sight unseen. This is something that, as with SETEL's component firms
previously, could be better dealt with on a direct NHPLO — supplier basis,
leaving Raytheon- out of the loop. The NHPLO was already set up to handle such
things as the contracting, audit, invoicing, and inspection functions.

In the area of inspection the NHPLO had long since worked out arrangements
with the national government surveillance services. As with SETEL before it
though, Raytheon did still have a management role to play, ascertaining after
the fact that the subcontractor had done what it said it had. 38

7 . The Production and Conversion Phase - Several Points of Interest
Production and conversion of the Improved Hawk system by this transatlantic
grouping of firms went quite smoothly, especially as compared to the previous

Chapter 12
A-22

iky

Improved Hawk Source: NATO's Fifteen Nation's

NATO Hawk Production and Improvement Programs

NATO Hawk Project. However, there are several issues that arose during the

production and conversion phase of the program that are worth noting for

future U.S. led transatlantic production projects falling within this Mode

of industrial collaboration.

a. Managing the European Subcontractors and Maintaining the Production

Schedule

Raytheon's approach to European supplier problems impacting its responsibi li ty

for maintaining the production schedule are worthy of mention. First of all,

in order to motivate the foreign suppliers to both respond to proposals in a

timely manner and maintain their production schedules, Raytheon followed an

approach of assisting them in overcoming any problem areas, while maintaining

a situation where any company that was late would be seen as delaying the
41

overall -program.

Aid in overcoming problem areas encountered on the European production and
conversion line principally took the form of an application of heavy doses of
technical assistance and occasionally management intervention. Raytheon and
the NHMO substantially underestimated at the beginning the amount of both that
would be reguired. In actuality, technical assistance alone turned out to be
about three times greater than estimated. Having to shell out for this
unplanned effort with minimal extra compensation, Raytheon was able to lessen
the impact by accomplishing much of the technical assistance back in the U.S.

A great deal of effort, however, was still reguired on location in Europe,
especially in those cases where strong management intervention was also called

Chapter 12
A-23

for. In the case of one Italian firm, Raytheon found itself having to send

teams in on short notice so often, that in the end Raytheon found itself in a

position of having virtually assumed production management responsibi lity.

In those cases where Raytheon assessed that certain management systems of a
supplier were not adequate, Raytheon found that they were generally able to
obtain European supplier acceptance of Raytheon's imposition of its own
systems. Raytheon attributed this receptiveness to the suppliers looking upon

it as part of the technical data transfer/learning experience associated with

. i 43

the program.

In response to the author's question, "Were there any particular problems in

dealing with your second tier subcontractors?" . Mr. Tucker pointed out that,

the general attitude of European industry towards their subcontractors is not

one of nranaginq them, but more that of awarding a contract and then expecting

performance. RAYTAS had to sometimes "help" them in this role. This was

evidentally particularly necessary where historical nationality sensitivities

hindered this function.

Additionally, it was pointed out that Raytheon did not have a problem with
European suppliers undermining or circumventing its leverage over them as
prime, by turning to their government or the NHPLO's staff and BOD. Raytheon
had actually been successful in working this route in the opposite direction,
working through the NHPLO's staff and the BOD national reps, as well as
national government agencies, to maximize their leverage over the suppliers.
This proved to be especially necessary as the effort was winding down and
Italian suppliers were pleading industrial relations problems, i.e. strikes. ^

Chapter 12
A-24

The Deployment of NATO’s
Integrated Central European
Hawk Belt

Italy

As a last resort, when a European firm hadn't delivered an urgently needed
item there was always the option of providing U.S. manufactured hardware,
since there was an alternative U.S. source for everything manufactured in
Europe for HELIP. The comingling of assets was allowed between the U.S. pro-
gram and the NATO program insofar as the U.S. production activities were con-
cerned. Naturally, concurrence by the USG and the NHPLO was required when
assets were loaned or exchanged to overcome European program bottlenecks. The
most significant case where the need arose involved the lending of a number of
missiles to the Europeans for around one year during a period of rocket motor
difficulty.^

In addition to the usual source start-up problems encountered, strikes were
endemic in Italy throughout the project.

Through-a judicious mix of assuring high visibility for problem areas, provid-
ing technical assistance on a bail-out basis, strong management intervention
when called for, and co-mi ngling of assets, Raytheon was generally quite suc-
cessful in keeping the project on schedule. Schedule was particularly impor-
tant as this was an improvement program where deployed hardware was being
removed temporarily from the field for overhaul and conversion.

Raytheon's Paul Rotondi offered some general observations with regards to his
experience at RAYTAS. First of all, though there were naturally variations
from country-to-country, he found the philosophy of contracting, generally not
to be as rigid in Europe. This approach is in line with the Continent's codi-
fied legal systems, where a given situation is pegged to a general principle

Chapter 12

A-25

instead of the Anglo-Saxon Common Law/case history approach which often leads
to entanglement in a cascadinq sequence of hair splitting ramifications .

Mr. Rotondi found the hardest adjustment to make involved European firms being

not as short term profit and schedule oriented, but instead giving higher pri-

ority to employment stability.

b. Flow of Hardware Across Borders

Three issues arose involving the shipping of equipment across borders. One of
the earlier educational experiences that Raytheon's subsidiary managing the
project, RAYTAS, was to undergo during HELIP concerned administrative problems
associated with the paper work involved in moving equipment across borders
(especially explosives). Raytheon solution to this problem was simply to hire
a European based transportation firm to handle the shipping side of the proj-
ect, once they had realized that outside help would be needed.

The problem did not end there however. A related problem that arose concerned
the blanket waiver of custom tariffs and duties as well as taxes that accom-
pany purchases by NATO and its subsidiary agencies, in this case the NHPIO.
Raytheon found itself unexpectedly faced with certain charges, after having
been told not to price for them due to the special status of the NHPIO. The
claim was for administrative expenses and the fees for handling T1 forms, T2
forms and bonding, explosive permits, etc. Regular duties and taxes were not

a problem since they were reimbursed as a matter of course throughout the per-

formance of the contract on a routine invoicing basis.

Chapter 12
A-26

The European subs, incurring the unanticipated costs, had been passing them on
to Raytheon. During 1975 there was a slow accumulation of complaints as the
unanticipated costs accumulated and became more visible, tying up increasing
amounts of working capital. Finally by late 1975, Raytheon began to tackle
the issue, and took on the task of convincing the NHPLO that something needed
be done on the governmental side with regards to implementation of the waiver.

Most of the resultant claim was to be for amounts actually paid to subcontrac-
tors who in turn paid fees to the custom officials. Costs were incurred as
early as 1974 and continued to accumulate through 1979. No claim for interest
on the negative cash flow was made. A settlement was finally reached in 1979
as Raytheon was moving into the contract close out phase of cleaning up loose

ends. The settlement was formalized in July 1979 for about $800,000, one-half

of which went to the European firms.

Another issue over which a problem arose involved European subs and the Inter-
national Traffic in Arms Regulations (ITAR) which are administered by the
State Department's Office of Munitions Control (0MC), in the Bureau of
Politico-Military Affairs. The ITAR govern the export of all hardware and
technical data on the U.S. Munitions List (Section 121.01 of the ITAR) which
includes virtually anything unclassified, or classified, associated with
we apons.

Foreign subcontractors in such programs must often resort to U.S. sources for
certain parts or materiel. Much as RAYTAS lacked European shipping experi-
ence, these European firms often suffer from a lack of knowledge with regards

Chapter 12
A-27

to purchasing from the U.S. sources. This can even be the case where U.S.
based multinationals are involved, as occurred during HELIP. This case
involved an Italian firm ordering some parts from a U.S. affiliate, which
resulted in a several month delay because of the U.S. firm's lack of the
required export license. In setting up such program's and providing the

smooth flow of goods and data, lower tier subcontractors can easily fall

through the cracks.

c. Contract Administration, Price and Cost Analysis, and Audit

Raytheon's Paul Rotondi provided a description of his activities during his
assignment as RAYTAS Manager of Industrial Contracts (1978-1980), spanning the
last three years of the project. This will serve to give us an encapsulation
of the division of responsibilities between the NATO procurement agency and
the U.S— prime contractor. In particular we will look at the working rela-
tionship in the area of price analysis and audit. When Mr. Rotondi arrived at
the beginning of 1978 to replace Raytheon's Larry Rice, the project had
already been underway for four years, being about 80% of the way through pro-
duction, overhaul and conversion of the Ground Support Equipment, and with
missile production about 60% completed.

At this point in time a considerable amount of change activity was going on.
This principally involved ECP's emanating from the NHPLO's incorporation of
on-going U.S. Army changes, but there were also some Raytheon originated
changes in scope resulting from European supplier claims.

Chapter 12
A-28

With several thousand ECP's being incorporated, and between 10 and 12 amend-
ments per contract (with 1 to 2 contracts per supplier, one for overhaul and •
conversion and/or one for production), virtually all the contracts remained
undefinitized for most of the project, as one open amendment incorporating one
or more ECP's built upon another open amendment. There was a major problem
def ini ti zing contracts and getting the paper work straight. With a thin audit
staff at the NHMO, there was a sizable back-log of undefinitized contracts at
any given time. In the interim the parties had to live with Not-to-Exceed
prices. This situation would last for a given change on the average one year,
and in some cases up to two years. As a result, at the end of conversion and
production, close-out of contracts was held-up. This apparently didn't upset

the Europeans, though, as they seem to place less priority on rapid close-

. 53
out.

In its rregoti at ions with the European suppliers, RAYTAS had to rely heavily on
the NHMO and its own price analyses. RAYTAS could negotiate prices utilizing
U.S. price history, and sometimes rely on competition, but Raytheon could not
obtain detailed cost data for a cost analysis. Raytheon could not review the
European supplier's books either. Cost analysis and audit involved with
ECP’s, cost reimbursable items, escalation and fixed hourly rate adjustments
was the domain of the NHMO.54

The European suppliers would submit their proposals to the NHMO through
RAYTAS.55 RAYTAS would forward these to the NHMO for approval and/or audit
after first checking as to the formula. After submittal, if the NHMO decided
fact finding for cost data or an audit was required, the NHMO would go

Chapter 12
A-29

directly to the European firms leaving Raytheon out of the loop. RAYTAS saw
the price, but not the detail. The contracts remained undef initized with
N-T-E prices in the interim.

The only exceptions to this rule were those changes where Raytheon, not the
NATO agency, paid. Here Mr. Rotondi would demand a cost breakdown as part of
the negotiation process. Here RAYTAS obtained hours, rates, and materiel
costs over the table, though the suppliers were not actually required to pro-
vide them. ^

8. The Role of NAMSO

Starting in 1965, the NHPLO began to gradually shift its NATO Hawk logistic
support functions over to the NATO Maintenance and Supply Organization's
( NAMSO Operational agency, NAMSA, with the latter finally assuming all these
support functions in 1975 at the time of the establishment of NAMSO' s fourth
operational center. The NHPLO and the NAMSA Hawk operational center are colo-
cated, at Rueil Malmaison, near Paris. This involved the same NATO staff, who
were simoly trans-ferred, without relocation, from one NPLO's jurisdiction to
the others.

In 1975, as the HELIP effort began to pick up, the NHMO finally transferred
the last of its Hawk logistics support responsibilities to NAMSA, ending a
decade of gradual transition. Since then there has been a theoretical ly clear
division: NHMO in Paris handles production; and NAMSA, in Luxembourg, handles
all support once the system is in the field. However, there was originally

Chapter 12
A-30

some doubt when the NATO Hawk European Product Improvement Program (PIP)
picked up in 1979 as to whether it would be NHPLO or NAMSA managed.

One noteworthy aspect of Hawk Weapon System Partnership (WSP) within NAMSO is
the periodic utilization of protectionist margins to promote the industries of
the seven participating European nations. If less than 15% above a bid from a
nonparticipating nation's firm, i.e. the U.S., a European firm wins outright.
If none are within this margin, any European firm that was within 15-30% of
the U.S. bid had the right to match the U.S. bid. However, this discriminat-
ing margin has not placed Raytheon at a significant disadvantage and has not
cost them much in the way of potential business.

NAMSA' s procurement policies generally push the allocation of work on a basis
which is as proportional as possible with that of program funding, i.e., U.S.
suppliers are competed with European suppliers wherever feasible as part of
the on-going efforts to develop and maintain European sources for the systems
supported (which are primarily U.S. systems in the inventory of several
European armed forces).

Raytheon and other U.S. firms are involved primarily with spares procurement.
Very little actual post-del ivery maintenance support is being provided by U.S.
firms to NAMSA, except in the area of the missile. 57

Raytheon has found NAMSA-rel ated business difficult to administer. In
Mahoney's opinion, if a contractor was not looking at a large volume of fol-
low-on business, the reporting, certification, and so forth, probably would

Chapter 12
A-31

make doing business with NAMSA overly burdensome. Furthermore, NAMSA
reportedly falls into the posture of treating everyone as a vendor, a role

Raytheon is not used to find-ing itself in. Here again, the General Admin-
istrative Clauses and Conditions (GACC) have prevailed, with Raytheon by and
large locked into NAMSA 's Terms and Conditions (which are based on the GACC).

9. HELIP - Lessons Learned

The lessons learned at Raytheon from the HELIP experience, as offered by Levi
were:

The importance of having a successful program in the U.S. preceding the
transatlantic coproduction effort;

Performance claims were backed by an extensive U.S. test program;

The value in having a mature program, with strong home government sup-
port, before expansion to a multinational program;

A successful multinational program requires strong industrial program
management;

Although Raytheon signed one contract with the NHPLO, the NHPLO repre-
sented six customer nations, each with a different set of pressures and
requirements. Therefore, it is important that a contractor be prepared
with alternatives for various mixes of national participation that can
allow for effective compromises within such a highly fluid grouping of
customer nations.

Raytheon's Bill Mahoney emphasized the following lessons learned from the pro-
duction phase:

Chapter 12
A-32

Importance of being set up to provide technical assistance and strong
management intervention on short notice, in case required, in dealing
with foreign subcontractors;

The importance of dealing in a timely manner with the administrative
aspects of international shipping during production as they impact on
customs- related paper work and ITAR.

The need for a U.S. prime operating in the European environment to be
familiar with the General Technical and Industrial Rules (GTIR) and
General Administrative Clauses and Conditions (GACC).

A U.S. firm should be looking at a significant volume of follow-on busi-
ness with NAMSA, if it is to justify the reporting, certification and so
forth, that doing business with NAMSA calls for.

The author would like to add to this list:

An openness to working in an environment where one must be willing to
move outside conventional national defense contracting practices, the
case warranting, as occurred here in the NATO procurement agency-U.S
prime contractor-European supplier relationships;

The sequential business and production relationships represented by the
evolution over the past 24 years of NATO Hawk, from the original license
production program (1958-1967), to the Hawk European Limited Improvement
Program (1974-1980), to the Belgian add-on (1979-1980), and most
recently, the Hawk European Product Improvment Program (PIP) (1980-1984),
along with the roles of the two NATO procurement agencies, the NHPLO and
NAMSA, are of import to the evolution downstream of other NATO projects

Chapter 12
A-33

wherein U.S. systems are introduced into the European inventories
through multi-national production schemes ( i . e . , Mode #2 with such
projects as Hawk, F-104G, Patriot, AIM-9L Sidewinder, and Mode #7 with
the F-15 Multinational Fighter and NATO AWACS) .

Given the diffuse set of hierarchical relationships experienced in such
transnational projects, in order for a prime contractor to effectively
carry out its sub-contract management responsibilities a balanced appli-
cation of the following approaches is required:

a f ami li arity with the foreign governments' and suppliers' ways of
doing business along with a willingness to meet them half-way when
feasible;

a need to work closely with and through the suppliers national gov-
ernment when necessary;

Close tracking of work progress, remaining ready to bail-out sup-
~~ pliers through the application when required of judicious doses of
technical assistance, strong industrial management, and the alterna-
tive of hardware off the original production line (when dealing with
second sources), while maintaining an awareness of the national
sensitivities of those involved.

The benefits that can accrue to all concerned when the institutional
relationships established between an international contracting authority
and its contractors are allowed to continue for follow-on projects,
building upon these relationships, instead of building up from scratch
for each new project.

In any operation requiring unanimity, unfortunately, the last hold out
can demand a pretty steep price for its participation, as did Belgium for
HEL IP.

Chapter 12
A-34

10 . Sequel

A later development concerning this project was covered in Chapter 11, under
Mode #6 of industrial collaboration, involving primarily a U.S. government
offset provided to Belgium in early 1979, in return for its finally adopting
the Improved Hawk. The Belgian's also bought their Improved Hawk systems
through the NHPLO through an add-on to the 1974 contract, of some five years
earlier.

A more recent collaborative sequel involving this system stems from the
European decision in the late 70 ' s (the nations operating through a special
NATO High Level Group in Brussels) to replace only their NIKE systems with the
medium and b-igh altitude Patriot (see Chapter 7). This is unlike the original
U.S. plan, wherein the Patriot was to be adopted to replace both the Improved
Hawk and NIKE systems. The U.S. too, though, has since backed off on its plan
to replace the Improved Hawk with Patriot. The system now has an indefinite
operational life with the U.S. Army.

The Europeans consequently will replace their high altitude Nike SAM systems
with Patriot (as will the U.S.), while for the medium altitude SAM require-
ment, they will follow a two pronged approach. The first prong involves a
short term solution which would lead to one or more European improvement pro-
grams to prolong the usefulness of the existing Improved Hawk systems. The
second prong will involve a longer term solution wherein France, the FRG, and
the UK will jointly design and develop a totally new system to replace the
EuroDean Imoroved Hawk system as well as the British Improved Bloodhound

Chapter 12
A-35

system. The new European medium altitude system is currently called TRI-SAM.

The pre-feasibility study was completed in June, 1981 and a feasibility study

was scheduled to begin in mid-1982.

The above set of decisions resulted in the fourth NATO Hawk related collabora-
tive arrangement along the lines similar to the original NATO Hawk program
(Mode #2 of industrial collaboration). The NHPLO awarded a $150 million con-
tract in November, 1979 for the project, called the Hawk European Product
Improvement Program (Euro-PIP) to a Franco-German consortium. Groupement pour
la Realisation Industrielle du Programme (GRIP) was established by MBB and
Thomson-CSF, as the parent company to oversee the modernization of NATO's
European Improved Hawk systems. ^

Raytheon's role has evolved over the last two decades from one of licensor and
provider- of technical assistance for the NATO Hawk program, to one of prime
contractor for HELIP, and back again to the original role for the Hawk
European Product Improvement Program (PIP). The Improved Hawk has involved
five Technical Slices since the end of the original NATO Hawk program (ending
in 1967). The first four within the framework of HELIP (Hawk European Limited
Improvement Program) launched in January 1974, and the fifth with Euro-PIP
launched in late 1979.

For the fifth Technical Slice (post-HELIP) , Raytheon determined that they
could be considered a serious contender if they teamed with a European firm,
with Raytheon in the role of subcontractor. Raytheon opted to go this route,

Chapter 12
A-36

For NATO-HAWK Production and Logistics Organization

HAWK PIP

Production + Installation + Integration

A success for industrial cooperation in Europe; Companies in France and
Germany as well as Belgium, Denmark, Greece, Italy and the Netherlands
participate in this program.

The first batteries have been upgraded and returned to operational status
on schedule.

GRIP

MESSERSCHMITT-BOLKOW-BLOHM GMBH

DYNAMICS DIVISION

THOMSON-CSF

DIVISION SYSTEMES ELECTRONIQUES

teaming with MBB. The two firms proceeded to set up a program which encom-
passed an industrial team including all participating nations. In late 1979,
MBB-Raytheon was selected over its competitor, a Franco-German team made up of
Thomson-CSF and Telefunken, by a vote of 6-to-l on the BOD. The decision
required unanimity, France being the only dissenting vote. MBB and Raytheon
were told that the French govern-ment ' s veto would hold unless Thomson-CSF
could be taken in as a third and co-equal partner. MBB and Raytheon decided
this was not feasible. The FRG then sided with France, and MBB switched team-
mates. The selection of the Thomson-MBB team as the prime contractor for the
four-year, $150 million Hawk EURO-PIP was announced shortly
thereafter in late November, 1979.^

Improvements which have already been qualified in the U.S. for its own
Improved Hawk systems, are to be incorporated into those of the seven European
user-Staies (Belgium, Denmark, the FRG, France, Greece, Italy and the
Nether! ands) .

The program will have a duration of 4 years, and this time around, the indus-
tries of all seven countries concerned are receiving subcontract work from the

Paris based GRIP roughly proportional to their financial participation in the
6 2

program. The work sharing program adopted was the one originally developed
by the MBB-Raytheon team. This included a vertical instead of horizontal
slicing of work packages, with absolutely no redundancy, e.g., work was
assigned so that there would be only one source for each generic item instead
of by sub-assembly wherein there would be multiple sources within the program
for similar items at the lower tiers. Raytheon and Westinghouse, from whom

Chapter 12
A-37

license rights have been obtained, are providing technical support to the par-
ticipants, i . e . , documentation, along with technical assistance and component
parts procured under Basic Ordering Agreements.

EURO-PIP was inter-related with the Belgian Improved Hawk procurement and off-
set, in that Italian industry, in return for its share of the work generated
by the Belgian add-on to HELIP, handed over its share of EURO-PIP to Belgian
industry.

At the end of 1980 the NHPLO was on the verge of finalizing another major pro-
curement, but this one was through Foreign Military Sales (FMS) channels. The
Defense Department informed Congress of a proposed letter of offer (LOA) to
the NHPLO involving a $120 million coproduction arrangement. The participat-
ing Europeans were to manufacture up to a total of 29 Litton Data Systems

AN/TSQ-73 air defense command and control systems, called Missile Minder.
Representing an expansion in the purview of the NHPLO ' s activities, the Mis-
sile Minders will provide command and control for not only the European Hawk

surf ace-to-air systems (medium altitude), but also for the European Nike

Hercules surf ace-to-air systems (high altitude).

The NHPLO is also one of the alernative candidates under consideration for the
government management role in the upcoming NATO-Europe Patriot SAM system pro-
gram covered in Chapter 7.

Chapter 12
A-38

B. F-16

1. INTRODUCTION: The Mode of Industrial Collaboration

Adopted for the F-1Q4G Replacement

In June 1975, after 13 months of evaluation, a purchasing consortium of the
four small Northern European NATO member states— Belgium, Denmark, the Nether-
lands, and Norway-selected the General Dynamics F-16 over its competitors,
France's Mirage F-l and the Swedish Viggen. As a prerequisite for eligibility,
each of the selling national teams had had to agree to considerable industrial
participation for the four selecting countries.

The F-16 was to replace the F-104G' s Starf ighters and smaller quantities of
several other aircraft in the inventories of the four European Participating
Governments (EPG's). The previous generation's F-104G's had been procured on
an entirely different basis in an earlier era. The two smaller nations,

Denmark and Norway, had been provided their small number of Lockheed built
F-104G's (and in the case of Denmark F-100's as well) through the U.S. Mili-
tary Assistance Program (MAP). Belgium and the Netherlands procured their
F-104G's as part of a combined European license production program including
the FRG and Italy as well (Mode #2 of industrial collaboration) . ^ Belgium
and the Netherlands also received a U.S. MAP subsidy equivalent to 25 air-
craft each for their 100 and 120 aircraft orders, repectively, and benefited
from the economies offered by a 949 aircraft program, made possible by the
FRG's large order.

Chapter 12
B-l

own aircraft, the MRCA Tornado, along with the U.K. The U.K . had given up on
its earlier attempt to unilaterally develop its future fighter (the T SR -2 ) in
the early 60's, and the subsequent two year try at jointly designing a fighter
with the French (the AFVG) from 1965-67 (see Chapter 13).

The Netherlands and Belgium had been early dropouts of the MRCA consortium in
1968-69, being unwilling to pay the premium required for, and assume the risk
of, partipating in development. They also knew full well that their idea of
the requirement would be submerged in what would be basically a British-German
program. Individually, the four EPG's had little or no clout. Even their
combined F-16 orders, only came to 348 aircraft or just over 1/3 of the pre-
vious F-104G project's. Therefore, this time around there would be no econo-
mies of-scale and German largesse that would justify license production along

the lines of Mode #2.~ The four smaller northern European NATO members' thus
opted to strengthen their positions by forming a consortium in 1974 to shop
for the best deal with regards to price, performance, and industrial offsets.
This turned out to be an arrangement, wherein the F-16 1 s would be produced in
Europe along the lines of Mode #7 of industrial collaboration, i.e.» a U.S.
led multinational production consortium.

Concurrently, 1974 saw a reorientation of U.S. priorities away from Southeast
Asia and back to NATO-Europe and the exigencies of NATO standardization.

2. The USAF Prototype Competition

The lightweight fighter had its genesis in 1970 when, with the abandonment of
the "Total Package Procurement" concept, the DoD directed the Air Force and
Navy to nominate innovative programs for prototyping. The object was to
reverse the mushrooming costs of buying weapons. The reinstituting of pro-
totyping was seen as a means for identifying and solving complex technical
problems at relatively low cost and thereby reducing the cost exposure inher-
ent in paper projections.

From a list of a half dozen candidates for prototyping, the DoD chose the
lightweight fighter, the advanced medium STOL transport (AMST - Boeing and
McDonnell Douglas), and the advanced tanker cargo aircraft (ATCA - again
Boeing and McDonnell Douglas). Though there was no visible requirement for a
new fighter aircraft in the DoD inventory— the F-15 and International Fighter
Aircraft Program (F-5) being considered adequate— there was a known requirement
for a new fighter in the European arena that would fall between these two in
performance and cost.

The Lightweight Fighter (LWF) Prototype program was launched in May, 1971. In
response to the RFP, six designs were proposed by five contractors: Boeing;
General Dynamics; Lockheed; LTV; and Northrop. The latter firm, Northrop,
responded to the RFP with two proposals, a single engine and a dual engine
configuration. In April 1972, General Dynamics was awarded a $38 million con-
tract to develop and produce two YF-16 prototypes and Northrop $39 million for
two dual engine YF-17 ' s . The remainder of the authorization went to General

Chapter 12

B-3

Electric for its YJ101 to power the YF-17 and to Pratt & Whitney for its F100
engine to power the YF-16 (the F100 already being in production for the LJSAF '

F- 15 ) .

Then the U. S. Navy came into the picture with its FY 75 budget request for
VFAX to complement its expensive high performance Grumman F-14 Tomcat. Con-
gress insisted at the time on commonality between the two services' aircraft.
The Navy was instructed to consider one of the two LJSAF designs for its Air
Combat Fighter which led to the two contractors forming teaming agreements:

GD with LTV, and Northrop with McDonnell Douglas, each new partner being
responsible for designing a version of the prototypes for Navy use.

The Air Force took the initiative in the joint Air Force/Navy LWF program and
developed a list of prototyping ground rules:

Existing force structure was not a constraint;

There would be a minimum of military specification requirements;
Funding would be limited;

There would be a competition before the system could go into produc
tion, although there would be no production commitment;

There would be minimum initial performance goals, and;

The system would be designated "Y" instead of "X" because it would
blend off-the-shelf and experimental technologies.

A gap between OSD and the Air Force, though, soon surfaced over the governing
philosophy to be applied to the LWF program. The Air Force viewed the LWF as
a pure technology expansion program with no inventory objective, while the

Chapter 12
B-4

design to cost forces in the OSD viewed it more as one having production
potential and was concerned that, unless there was heavy use of off-the-shelf
technology, new technology requirements would adversely impact availability.

The concept for the program was essentially one of the government following a
hands-off approach, permitting the contractors wide latitude to carry out pro-
totype development with few Air Force managerial restraints. The Program
Office would simply monitor the contractors' progress. Set up in September
1971, the initial manning of Program Office was 17, with one co-located
engi neer .

Designed for the most demanding tactical air mission, air superiority, the LWF
also had the characteristics to fly intercept, interdiction and close air sup-
port missions. What the Air Force wanted was an aircraft that could outmaneu-
ver Soviet fighters where air combat is fought— at altitudes up to 30,000-

40.000 feet and Mach numbers of 0.6-1. 6. Warsaw Pact forces had large num-
bers of air-to-air fighters, MiG 21 J ' s and MiG-23 B' s , that operated in this
regime. The multimission LWF was also designed to intercept M i G- 23 S and Su-19
ground attack aircraft.

The single Soviet front-line fighter that the LWF was not designed to match is
the MiG -25 -A Foxbat, a Mach 2.8 aircraft that has a service ceiling above

80.000 ft. The objective for the LWF was not to optimize at a point in the
sky, but across the range of air combat. So the critical design goals of the
LWF became maneuverabi 1 ity (i.e. turning rates and acceleration) and range.

On this latter point, the F- 16 was to have 2h times the radius of action of
the F-4.

Chapter 12
B-5

In late 1973/early 74 things started to develop at a fast pace. First, the
Arab-Israel i war of October, 1973 brought U.S. tactical planners to the reali-
zation that numbers of fighter aircraft are as critical as top performance in
battles to win and maintain air superiority. This was to be the key motivat-
ing factor contributing to the 1974 decision to develop one of the LWF proto-
types from a technology test bed into a production aircraft that would supple-
ment the expensive top performance F -15 and help to off-set the Soviet Union's
numerical advantage in the air.

Secondly, when performance and financial figures came in, in early 1974, pre-
vious scepticism within the DoD and the USAF vis-a-vis the LWF concept evapor-
ated. Following a February 1974 guidance from the Secretary of Defense stat-
ing that .... "The Air Force should program funds for development of a
low cost fighter . . . ." the USAF created a Tactical Fighter Modernization
Study Group in March. The group concluded that cost considerations and per-
formance potential suggested complementing the replacement of the F-4's by the
F-15's with an operational derivative of the LWF.

Though there was no evidence that the surfacing interest of several smaller
European nations in replacing their F-104's had any impact on the missioniza-
tion of the LWF for the USAF (this version being called the Air Combat
Fighter) the group did point out the potential foreign military sales benefits
to the U.S. of European involvement.

In late May, 1974, a month after the Tactical Fighter Modernization study had
been completed, developments on both sides of the Atlantic began to move

Chapter 12
B-6

When the U.S. Navy and Marine Corps needed a single versatile aircraft to replace both
the F-4 Phantom and the A-7 Corsair, they selected the multi-role F/A-18A Hornet.

The F/A-18A provides dogfight capability superior to any tactical fighter in the Navy inventory.

Light attack capability greater than any airplane in the Naval attack community.

Reliability projected to be three times that of either of the two aircraft it will replace.

Northrop is associated with McDonnell Douglas, prime contractor to the U.S. Navy, for
development and production of the Hornet. Northrop will be prime contractor for derivatives
designed for land-based operations.

The F/A-18A Hornet. More reliable. More capable.

NORTHROP

Making advanced technology work.

towards a nexus. A delegation of representatives from four European nations —
Belgium, Denmark, the Netherlands and Norway — having formed a purchasing
consortium for an F-104G replacement, came to the U.S. for a briefing. The
Europeans made it clear that, in addition to a new plane, the price of eligi-
bility for competing with the French and Swedish offers would involve adequate
industrial compensation, as well as the U.S. selecting either the YP-16 or
YF -17 within the following four months. The DoD accepted the requirement for
industrial offset, but faced a problem on speeding-up the U.S. source
selection, a decision that was not scheduled for another year; May, 1975. The
issues faced were: how much could the U.S. evaluation process be shortened;
and how could the European requirements be balanced with those of the U.S.

Navy?

The Air Force did move source selection forward from May up to January, 1975,
but at -that time the U.S. Navy was unable to commit and bowed out of the pro-
gram. The edge in the selection went to General Dynamics, primarily because
of relative performance factors. As it turned out the Navy subsequently
selected in May, 1975, the McDonnell Douglas/Northrop YF -17 whose operational
derivative was redesignated the F-18. So, for full scale development what was
originally to have been a joint USAF/Navy program, became a joint USAF/four
European Air Forces program, with the U.S. Navy going its own way with the
alternate prototype.

Meanwhile; in early September, 1974, after several months of negotiations dur-
ing which the four European governments hammered out the DoD's initial commit-
ments that would accompany consideration and selection of the U.S. fighter,
the Air Force's Aeronautical Systems Division (ASD) had issued the RFP for
Full Scale Development and Production to GD and Northrop, including, inter

Chapter 12
B-7

alia, an ASD cover letter, proposal preparation instructions, and a model con-
tract. These documents, reflecting the fundamentals of the U.S. offer to the
European consortium, instructed the competing contractors to submit their
co-production plans. Receipt of these instructions resulted in intensified
efforts on the part of GO and Northrop to line up potential European partners.
They perceived this as a vital part of the competition, one for which the
Source Selection Criteria established a grading category that scored the rea-
sonableness and adequacy of the contractor's co-production planning.

Representatives of the four European governments took part in the source
selection. Though not yet having committed to a U.S. system over the compet-
ing French and Swedish systems, they insisted on being treated as partners,
not foreign military sales customers. They were therefore, allowed to partic-
ipate as working members of the evaluation team, not observers. The Europeans
had input, even though the U.S. made the decisions. The expertise provided by
them was heaviest in engineering, but also included finance, military opera-
tions and management. After the five-country evaluation, the European repre-
sentatives came to the conclusion that either aircraft would be acceptable.
This opportunity to participate in the U.S. source selection process, as
opposed to the more conventional marketing approach followed by the French and
Swedish with their individual aircraft, was reportedly, in the view of SPO
officials, a turning point in the European competition.

With the U.S. selection of the YF-16 in January, 1975, and the Navy's dropping
out of the program, the USAF was ready to proceed with the full scale develop-
ment and procurement of an operational derivative of the prototype. The

Chapter 12
B-8

four European nations, however, had still to

make up their minds as to whether

an American, French or Swedish fighter

would be adopted.

Chapter 12
B-9

*4-

3. The Offset Battle in Europe

In February, 1974, when Belgium, Denmark, the Netherlands and Norway had
jointly established a requirement for replacement of their F-104G ' s and other
similar vintage fighters, they estimated their needs as ranging between 325
and 380 aircraft. On May 2, the four Ministers of Defense formed a Joint
Military Steering Group to evaluate candidate aircraft. Though the Belgian
Minister wanted an immediate selection, the other three persuaded him to delay
until September.

On May 20, 1974 the four nation steerinq group invited the governments of
France, Sweden, and the U.S. to submit bids for their common selection of a
new fighter. Over the following 13 months the three nations competed in an
all out high-stakes poker game for what came to be labeled by the French news-
paper, L-e Monde, "le marche du siecle" (the arms deal of the century). This
relatively small procurement appeared to potential producers to be the "tip of
the iceberg" for a new generation of NATO and world-wide fighters. The con-
sortium contracts coupled with a contract from their own armed forces could be
expected to give a contractor a significant advantage over competitors.

The U.S. entry was to be the Air Combat Fighter, a missionized fighter to be
derived from one of the two competing Lightweight Fighter prototypes offered
by General Dynamics and Northrop.

The French entry was the Dassaul t-Breguet single engine Miraae F-1E, an inter-
ceptor with a secondary attack role. The F-l was already operational, the

Chapter 12
B-10

first squadron had been commissioned in January, 1974. The French Air Force
had placed orders through 1977. An even larger number than the French order
had been sold to other nations. The proposal for the 1 E 1 Model included
incorporation of a new engine, the SNECMA M53, not scheduled to fly until the
end of 1974.

The Swedish entry was the Saab-Scania single engine Viggen, already opera-
tional in the Swedish Air Force, which had one attack wing funded and planned
to fund the two remaining wings by 1977. The advanced JA37 fighter version
was expected to be operational in early 1978.

The themes behind each of the three competing national offers might be

The U.S. pushed NATO Standardization and stronger transatlantic ties,
especially since the U.S. A. F. would be basing at least 300-400 F-16/17's
in Europe (compared to the small number of F- 1 1 s currently in, or planned
to enter, France's inventory). France was a member of NATO, but not of

The French worked hard on the concept of an evolving European aerospace
industry and the major impact the decision would have on furthering it,
while lessening the dependence of the European aircraft industry on the
U. S.

The Swedes being both outside of NATO and the European Economic Community
(EEC) had no real options in the way of political appeals of the nature
of those of the U.S. and France, nor did they have as broad an aerospace

industry base as the other two, and so instead, made their play on the
basis of a set of packages of industrial offsets for each nation that
included major non-aerospace elements as well. Sweden's best chance was
considered to lay in a collapse of the consortium that would at least
allow them to win over one or two members.

In early June, 1975, Denmark, the Netherlands and Norway selected the U.S.
contestant, the F - 16 . Belgium demurred, but agreed to go with the F - 16 a week
1 ater .

a. The U.S. Proposals

As previously mentioned, in the first meeting with the four nation steering
group in late June, 1974, Deputy Secretary of Defense Clements conveyed to the
four that the U.S. was willing to complete prototype source selection in
January, instead of May, 1975, if they could postpone their decision until
then

At the second meeting with the Steering Committee in mid-July, the U.S. made a
number of additional commitments to the four governments:

The commitment that "The USAF will make a source selection of the LWF by
January 1, 1975;

This aircraft, once fully qualified would enter the USAF tactical fighter
inventory and would be deployed in Europe;

Chapter 12
B - 12

The Air Force would establish a NATO liason office within the LWF Program
Office, if any consortium member wished to participate in the program
prior to source selection, they could assist in the preparation of RFP's
and source selection;

The U.S. delegation agreed to provide cost estimates, and;

In response to the Europeans' emphasis on significant participation in
production the DoD would negotiate a government-to-government agreement
committing the U.S. to the following:

(1) the four nations would produce 10% of the value of the USAF buy
(with final assembly in the U.S.),

(2) the four nations would produce 50% of the value of their own pro-
— curement with final assembly in Europe and,

(3) the four would produce 10% of the value of 3rd country sales.

Guarantee for these commitments created a very sticky problem. The U.S.
sought to avoid the term 'guarantee' whenever addressing production shares,
while the Europeans sought them, stressing that the lack thereof would create
a major roadblock in their selection of the YF-16/YF-17.

Also of import in this agreement was the fact that, as stressed by Deputy Sec-
retary of Defense Clements, this was the first time the U.S. government had
intervened in an international sales competition on behalf of an American air-
craft that had yet to enter full scale development. One of the major implica-

Chapter 12
B - 13

tions of this precedent was its dilution of the DSARC process. "While the
DSARC principals were parties to the guarantees, these self-same commitments
effectively made the DSARC' s that were to follow pro forma.

The four European governments submitted their counter-proposal for their
industrial participation shares near the end of July, in which the 10-50-10
formula would be adjusted to a 10-40-20 plus a guarantee that the off-set
level would be no less than 70% of the value of their aircraft purchase.^

In August, after consultation with the Program Office concerning the feasible

range of compensation, the U.S. delegation met with the consortium in

Brussels, Belgium, and offered to revise the prior 10-50-10 formula to

10-40-15. In addition, the U.S. made a commitment of 58% on the consortium's

portion if it was 1,000 aircraft program, 80% if 1,500 aircraft and of 100% if

1,967 aircraft were eventually produced. Any offset production beyond the

100% level was to be a subject for further negotiations. The U.S. delegation
returned with the impression that their offer had been favorably received, as
well as the consortium's agreement to postpone their September decision dead-
line to mid- January, 1975.

Leading the delegation, and chief U.S. negotiator from this point on, was the
Assistant Secretary of the Air Force, Installations and Logistics, Frank
Shrontz (soon to occupy the same position at the DoD level). Other members of
the delegation included representatives from the Departments of State and
Defense, USAF Headquarters and the Air Force Aeronautical Systems Division
(ASD).

Chapter 12
B - 14

Fred Wood, the civil servant who served as the SPO's Business Manager, was to
later refer to this U. S. team, plus his experiences in working post-MOU busi-
ness problems, in citing, what in his view, were the two most significant
lessons learned during the project.

Keep the team of actors small and thereby avoid institutional petrifica-
tion .

Because of differing business/cultural moeures, one must be willing to
meet the other participating nations half way.

On the latter point he cited his ability to speak French as having been help-
ful. On the first point, another member of the USAF negotiating team, Col.

Ron Carlberg, pointed out several years later while discussing the program
with several USAF and Boeing participants involved in putting together the
NATO AWACS project, that, unlike the F - 16 project with Frank Shrontz, the NATO
AWACS project suffered during the proposal phase in that there was no one
person ever really steering the project. Not only did Shrontz provide direc-
tion and continuity to the U.S. proposal effort, but as pointed out by Col.
Carlberg, Shrontz was exceptional in that he came from the industry side
(Boeing), and knew the importance of keeping industry in the loop. Shrontz
made it a practice to have GD and Northrop in for meetings to clear industrial
commitments prior to passing them on to the Europeans. This issue of coordi-
nation of U.S. Government- Industry positions prior to coordination at the
government-to-government level has haunted the U.S. in virtually all its
i nter- al 1 i ed proj ects .

Chapter 12
B— 15

Under the pressure of severe competition from the French and Swedes vis-a-vis
the terms of industrial participation, further U.S. concessions were to follow
in early 1975, following the U.S. selection of the General Dynamics YF -16 as
the development vehicle for the new Air Combat Fighter (ACF). This pressure
was to further increase as the consortium's January selection deadline began
to slip through winter and well into the spring of 1975.

For the initial production run of an F - 16 produced solely by U.S. industry,
the unit flyaway cost was estimated at S4.6 million in FY 1975 dollars and the
unit program cost (including spares, support and training equipment and data
as well) was estimated at S6.7 million. The U.S. negotiators submitted a new
proposal to the consortium in January, featuring for the- first time a "most
probable" average unit flyaway cost of $5.69 million 1975 dollars, and an
estimated "not-to-exceed" price of $6.09 million in 1975 dollars. These fig-
ures included $670,000 (later reduced to $470 K) for recoupment of U.S. R&D
costs along with the extra costs of establishing two new production lines—one
in Belgium and one in the Netherlands. In addition to this unit fly away
cost, it was judged that spares might add 20% to the unit price, and ground
equipment another 15%. The 10-40-15 formula for industrial participation was
maintai ned.

At this point, the consortium, after analyzing the various aircraft proposals,
was most concerned over the threat of inflation and fluctuations in the
exchange rates during the life of the program. The recent experience of the
U.S. economy, in particular, was not reassuring on this score, and none of
the proposals, including the French, was altogether clear. So the consortium

Chapter 12
B— 16

further postponed their decision pending a clarification of the three sets of
proposals and, possibly, further concessions by the prospective sellers. The
responses to the purchasing consortium's queries were not completed until
March 17, and meanwhile further concessions were indeed forthcoming.

On February 26, 1975, Deputy Secretary of Defense Clements announced that the
U.S. would allow the 15% production participation on third country sales to
continue indefinitely after the 100% compensation level had been achieved.

In their clarifying submission in mid-March the U.S. negotiators offered a
detailed analysis of price escalation and currency fluctuations as they
related to the U.S. proposals. With regards to price, the U.S. analysis cen-
tered on an explanation of the assumptions upon which it had based its "not-
to- exceed" price which included:

the assumed purchase quantity, and;

the applicable U.S. and European national indices to be used in computing
escalation allowances.

On the currency issue, U.S. negotiators were constrained by the legal require-
ment that defense contracts be expressed in U.S. dollars. Congress would not
even consider supporting a possible footing of the bill on a unilateral basis
by the U.S. for any potential exchange rate losses. In any case, with the
post-1973 international monetary system being based on floating exchange
rates, it was expected that any fluctuations would tend to be counteracted by

Chapter 12
B-17

differential rates of inflation over the long-run. Furthermore, since the
production for the European purchased aircraft were divided approximately on a
40/60 basis between Europe and the U.S., the swings would be dampened. For
example, any increase in the cost of the aircraft due to appreciation of the
dollar would be partially offset by corresponding decreases in the European
built portion of the system.

In its May 2, 1977 special issue on the project. Aviation Week & Space Tech-
nology printed an interview with Frank A. Shrontz, the former chief U.S. nego-
tiator during the competition for the F-104G replacement in his capacity as
Assistant Secretary of the Air Force Installation and Logistics ( I&L) and
later Assistant Secretary of Defense, I&L. (By the time of the interview
Shrontz had returned to Boeing as its Corporate Vice President for Contracts.
In this capacity he co-sponsored the initiation of this business history of
NATO several months later.)

According to Shrontz the most difficult factor in selling the USAF's ACF in
Europe was the need to assure the consortium members that the U.S. had credi-
bility in weapons collaboration. The credibility of the U.S. had evidently
been seriously undermined when anticipated offsets had failed to materialize
after pior sales such as the Lockheed C-130, tanks, missiles, and radars.

This time they were determined to pinn down the U.S. on its commitments .9

Another big job, Shrontz mentioned . . . ."was to establish in their minds
that they would participate and not be subcontractors .

Chapter 12
B-18

On the other hand, the easiest point in the negotiations according to Shrontz
was that the U.S. had the best product. Price, however, was another problem.
It was tougher to sell, "but we aproached the program openly and candidly. We
gave assurance that it was a good program under cost control and that we gave
the competitors a fair evaluation." The U.S. was able to generate confidence
among the consortium participants, during the following source selection. "We
literally laid the whole book open to them," Shrontz said. This was a partic-
ularly sensitive point since "we have to pass on what the real costs are. The
French appeared to guarantee a fixed price."

"General Dynamics could give a ' not-to-exceed' cost. The U.S. government
could not guarantee a maximum cost."^

Politically, Shrontz said, "we worked pretty hard on the theme of NATO Stand-
ardi zat4on ," since the U.S. would be basing several hundred F-16 1 s in
Europe.^

While the U.S. was negotiating with the consortium, "the French worked very

hard on the concept of a European aerospace industry. They pressed the point

that they had an aircraft in existence with a good track record. They guaran-
13

teed their price."

Continuing on this point in the same Aviation Week & Space Technology article
Blaine Schei deman , GD's Vice President and director of the F-16 Program,
added, "The F-l competitor was a credible aircraft but we felt it represented
the end of a line of development, while the F-16 is the first of a new line. ^

Chapter 12
B-19

From the contractor's viewpoint, Scheideman continued, having 11 . . . . deter-
mined that the NATO countries wanted a U.S. aircraft only if the U.S. put it

in its inventory, unlike the Northrop F-5 and F-104, "... our strategy was

to win in the U.S. first, and then sell in Europe."

Fred Wood, international business advisor in the USAF's F - 16 SPO, believed
that the prior U.S. procurement decision was the single most important contri-
bution to the eventual European selection. "What swung the deal is that the
Europeans didn't want to buy an aircraft from a supplier. They wanted govern-
ment involvement. They wanted to be sure the U.S. had a vested interest and
that they would co-produce a part of the U.S. machine. ®

b. The French Proposals

For France the F-104G replacement competition involving Belgium, Denmark, the
Netherlands, and Norway was the fifth in a series of 'NATO' multi-national
fighter competitions. First, France's two finalists in the 1957 NATO Light-
weight Strike Fighter (LWSR) prototype competition (one from Dassault and one
from Breguet) lost out to the Italian Fiat G-91 in a controversial decision,
after which there was somewhat of a backlash against NATO and the U.S. in
France.^

Secondly, for the German multi-purpose fighter competition of the following

year, 1958 (one which, after selection, expanded to involve three other NATO

Nations, Belgium, the Netherlands, and Italy) the Lockheed F-104 beat out

France's Dassault Mirage III. This was followed by screams of foul in France,

and unfair U.S. government intervention. The German Government had even

Chapter 12
B-20

A This French Air Force Mirage F.1 is equipped
with a Caiman offensive jammer under its fuselage,
as well as a Remora self- protection jammer under
the right wing. Also visible are the antennas on the
vertical tail of the BF-series radar warning receiver.
All three EW systems are from Thomson-CSF.

held up release of the final decision fearing the political repercussions that
it would have in France. As de Gaulle had just returned to save the nation
from collapse into civil war, the prestige of France, the de Gaulle government
and the new republic (France's fifth), was on the line.

Thirdly, France's V/STOL Mirage I I/Balzac design was a finalist in the

January, 1962, impasse over the G-91 replacement NBMR3-an impasse that was

never resolved and led to several unilateral national developments — NATO being

further discredited in French eyes.

Then, in 1968 Belgium and the Netherlands were planning to choose a common
ground support fighter, operating as a consortium for both selection and
production, but France was able to lure Belgium into breaking ranks and
selecting the Mirage 5 — leaving the Netherlands on its own to select the

Northrop F-5 and produce it collaboratively with another NATO ally, Canada.

So here the French were facing round number 5 in a series of competitions for
a fighter order by a multi-national grouping of NATO member countries. Their
contestant, the Dassault Mirage F-l had already been selected by two NATO
European nations— one in NATO at the time, Greece, the other closely aligned
and eventually to join NATO, Spain.

Building up from a small initial order base of 40 aircraft provided by the
Armee de 1 'Air, the Mirage F-l got off to a promising start through export
sales.

Chapter 12
B -21

This Armee de 1 'Air order base gradually increased to 246 F-l's by the fall of
1980. Though the F-l had originally been developed for export purposes, there
being no Armee de l1 Air requirement, it came to serve in an ever expanding
gap-filler role as replacement schedules slipped for the Avion de Combat Futur
(ACF), and then for the Mirage 2000.

One of the consortium countries, Belgium was actually already participating in
the production of the Mirage F-l, through the firm SABCA (50% owned by
Dassaul t-Breguet) . This F-l production role emanated from an external offset
following the prior 1968 Belgium order for the Mirage 5.

The Mirage F-l had entered service with the Armee de VAir in early 1974,
powered by an Atar 9K50 engine. For this competition Dassault was offering an
advanced version of the F-l powered by the new SNECMA M-53 engine. The F-1E

was also serving as the M-53 flying test-bed. The first flight of this

version designated the F-1E would not be until December, 1974.

In mid-1974, French government and industry initially proposed a rather vague
offset package worth 100% of contract value; and absorption of prototype

development and testing costs of F-l, non-recurring R&D cost for the SNECMA
M-53 engine, and 50% of airframe I R&D costs. The French government was pre-
pared to guarantee that if any two or more of the countries adopted the F-1E

version of the fighter, it would be adopted by the Armee de 1 'Air, as well.

For the second proposal, of September, 1974, France was forced to be more
specific. This led to an off-set offer involving recoupment of 70% of the
acquisition costs of the aircraft for this purchase alone, with higher per-

Chapter 12
B-22

centages of 82% being possible if projected third country sales materialized.
The purchasing countries would be expected to pay half of their pro rata share
of F-l development costs, but be guaranteed a firm fixed flyaway unit price
equivalent to $5.5 million with France absorbing any inflation over 7%.

As selection once more slipped in January, 1975, France again revised its pro-
posal. The French government was now prepared to increase its 40 aircraft
order for the Armee de 1 1 Air to 120 aircraft to match the largest single-
country purchase, even if this meant delaying its own planned follow-on
fighter program, the Avion de Combat Futur (ACF). In addition, the French
froze the price at 27 million francs (equivalent to $6.4 million at that time)
and offered a guarantee that any cost escalation due to inflation would be
absorbed above specified levels: above 7.5% during the first three years;
above 16.5% in the next three, and above 5.5% in the last three. This time
around the French were again speaking of a 100% offset, claiming a larger
expected sales of 1,000 aircraft, but also adding on work on a piece of the
next generation ACF program if and when it went into production.

As the selection deadline continued to slip and the competitive pressures
built up while awaiting the hour of decision in March, France submitted, along
with the U.S. and Swedish governments, additional details requested by the
consortium concerning inflationary and currency exchange loss guarantees. In
addition, to these and other financial issues, ranee restated and broadened
its pitch with regard to its management, political, technical, and industrial
aspects.

Chapter 12
B -23

In addition to the inflation and currency issues the French proposal also was
obliged to respond to the multi-national steering group's recent conclusion
that the F - 16 was significantly less costly than the proposals from Dassault
and Saab-Scania .

The purchasing consortium considered the gap was too great between Dassault's

price of 27 million francs unit fly away cost for the aircraft in its basic

interceptor configuration and the real price of the fully equipped aircraft

configured for its multimission requirements including the ground attack,

long-range interdiction and fighter missions, estimated by them at the

equivalent of S9.5 million.

Dassault countered this assertion with the following set of arguments. First,
they contended that the unit fly away cost for the F-l was a firm, fixed price
that cowld be guaranteed because of the limited technical risks involved.
According to Dassault, the two aircraft were not comparable at the present
time since the U.S. aircraft was only an experimental prototype still requir-
ing development and debugging over a several year period. In contrast the
Mirage F-1E was already a well proved aircraft offering the best compromise
for the 4 countries' broad range of mission requirements and one that could
offer an operational system in a very short period time. While down-playing
the developmental nature of the SNECMA M53 engine, Dassault pointed out the

major cost overruns on several U.S. programs, and particularly General

Dynamic's F- 111 experience, to support the argument.

Chapter 12
B-24

On exchange rates, the French stressed that their proposition involved only

European currencies, which have a far greater stability among themselves than

with respect to the U.S. dollar.

Dassault further supported its price on the grounds of the guaranteed maximum
inflation rates that it had offered back in January, and its offer to
establish a multi-national technical management team. The team would provide
for substantive participation in project management, and among other tasks,

approve or reject proposed modification to the F-1E once a baseline technical

and operational definition of the aircraft was established.

The principal new price-rel ated argument put forward by the French in this
March round, was however, a new pricing formula for the F-1E that would theo-
retically lower the cost of the aircraft by about 23% and thereby put it at
approximately the same price level as the competing F-16. The new formula
i nvol ved:

an 8% reduction in industry1 s costs (but Dassault's non-French suppliers
had yet to agree to a reduction of their 36% of the aircraft);

a 5% reduction through a French government contribution, and;

an assumed rise in the value of the U.S. dollar by 10%.

On the political front, French thrusts continued to concentrate on the theme
of European unity and cooperation, in both the aerospace field as well as
other sectors such as computers, nuclear energy, and agriculture. In aero-

Chapter 12
B -25

space French negotiators presented some vague proposals for total integration

of the European aviation industry and even French acceptance of reintegration

into the military side of the Alliance.

The industrial collaboration package, in the French view, should be viewed as
a significant step towards realization of the European aerospace industry.
Unlike the U.S., France was offering a single source package for all F-l's
produced after the multinational team is set up, with the only limit on offset
being on the value of ultimate sales. This would naturally lower production
tooling costs, because only one set would be required (existing tooling being
transferred to the purchasing countries). Despite this non-duplication of
manufacturing, like the U.S. offer, the French proposed the attractive if
somewhat wasteful characteristic of assembly lines in two of the consortium
countries. (Unlike the earlier F-104G project though, the European assembly
of the-ceplacement fighter would involve Belgian and Dutch industry acting in
the capacity of subcontractor , not as a licensee and thereby a prime contrac-
tor fully responsible for the end product.)

The guarantee of 70% offset on the consortium purchase on all sales up to 600,
and then increasing in a straight line to 100% at 1,000 aircraft sold, still
held. This time though the French were emphasizing the 140% that could be
reached with sales of 1,500. For Belgium and the Netherlands, with larger
aerospace industries than Denmark and Norway, the total offset could reach
200% at the 1,500 aircraft point. ^ v

Citing all the above factors as evidence, Dassault represented its fully inte-
grated sole-source effort as a true European co-production program. The U.S.

Chapter 12
B -26

program, they pointed out, would only reduce their industries to the status of

second source subcontractors subject to fluctuations in the American workload,

which could result in all work eventually being drawn back to the U.S.

The list of prime candidates for European industrial participation on the F-1E
program very closely resembled the U.S. list. These were:

Belgium— Fairey and SABCA, forward, mid- and aft fuselage sections, empen-
nage and final assembly of aircraft for Belgium; Fabrique Nationale
Herstal, components for Snecma M53 engine; Gebecoma, a grouping of
Belgian aerospace equipment manufacturers , would provide much of the
equipment for the F-1E.

Nether lands— Fokker-VFW, mid-fuselage sections, fuselage fittings for all
aircraft and final assembly of aircraft for the Netherlands; Philips'

Gloei lampen-Fabrieken, components for Thomson-CSF radar and lead contrac-
tor in the Netherlands for electronics and avionics work on the F-1E;
Optische Industrie de Oude Delft, heads up display work in conjunction
with either Thomson-CSF or Marconi -El 1 iott; DAF (Van Doorne's Automobiel
Fabrieken); hydraulics in conjunction with Messier-Hispano of France; Sun
Electric, mechanical equipment.

Denmark — Per Udsen, Terma Elektronik, Bravour Div. of AGA and Disa
Elektronik, were to receive work for the electronics and avionics.

Chapter 12
B -27

Norway— Kongsberg Vapenfabrikk would be lead contractor in Norway for avion-
ics production. Engine work would also be placed with Norwegian firms
(unspecified as of that time).

It is noteworthy that the French qovernment and press seemed to place a greater
value on the European consortium's order than the Armee de 1'Air, or the French
aerospace industry. The Armee de 1'Air never expressed any desire to receive
the F-1E despite the January commitment of the French Defense Minister to order
at least as many aircraft as the largest single European buyer. The Armee de
1'Air felt that the F-1E acquisition jeopardized, or at least delayed the devel-
opment and procurement of its ACF for the 1980 ' s. French industry as well was
reportedly showing some reservations on the price it would have to pay in

diverted development funding, lost work, and possibly sales for this major

political achievement.

The Armee de 1'Air considered the F-1E not only costly but marginally better

than the Mirage F-l's powered by the Atar 9K50 engines. Ultimately no Mirage
F-lE's were ever produced, the M-53 powering only the Mirage 2000 in the end.

c. The Swedish Proposals

The Saab-Scania 37E Eurofighter, variant of the Viggen, comoeting for the NATO
F-104G replacement, was to be a hybrid of the original attack version of the
Viggen, the AJ37 (in squadron service with the Swedish Air Force since mid-
1973), and the JA 37, an all-weather fighter version of the Viggen (entry into
service being scheduled for 1978). The JA37 Viggen was the fifth version of
this Mach 2 combat aircraft to be developed. ^

Chapter 12
B-28

In the early 70 *s Swedish export policy toward military aircraft underwent a
drastic change, slackening its previous restrictive policy of selling only to
'non-aligned* nations, so as to be able to offset the vertiginous rise in the
cost of new development programs by exports. It was expected that the Swedish
Air Force would ultimately receive some 400-450 Viggens in its various ver-
sions. which is little more than half of the 750-800 planned when the program
was launched in the mid-60's. The 4 country consortium's order of 348 air-
craft would have helped to counter-balance this problem. However, at the time
most observers of the competition gave Sweden only an outside chance of winning
the contract. This was a judgement predicated primarily on political considera-
tions, Sweden being both a non-NATO and non-EEC country. Sweden's main hope
was to be able to counter these considerations by a very generous internal and

external offset package, the multi-role aircraft's technical qualities, and a

possible break up of the consortium.

On this latter possibility, the Saab-Scania proposals of April, 1974, were
originally aimed individually at Belgium^ and the Netherlands, dismissing the
possibility of the consortium holding together. Saab-Scania considered these
two consortium members as the only two that could allocate funds at this stage,
and offered each a separate offset package. In contrast to the early French
and U.S. offers, the Swedish one was not originally based on an integrated
effort. The Swedes figured Norway and Denmark could only declare a possible
interest, not being in the position to make a firm commitment until 1977-79.

The Swedes showed that they were willing to ao to extreme lengths in catering
to consortium sensibilities regarding its non-NATO status (of major relevance

Chapter 12
B-29

in time of conflict), and in supplementing aerospace offsets with other non-
aerospace work. In order to ensure complete program independence the Viggen
would be produced completely within NATO countries. The airframe, engine and
major avionics components were to be managed and produced mainly by industries
in the purchasing countries, but with the U.K., the U.S., and the FRG also
receiving some work, as they were already suppliers of certain sub-systems.

Based on a 100 aircraft order by both Belgium and the Netherlands, Sweden was

offering each aerospace industry work totaling approximately 20,000 man years

or 60% of the aircrafts' purchase price. This would also involve immediate

industrial particioation in the development work for the Eurofighter version

of the Viggen. The fact that 40% of the equipments in the Swedish aircraft

were of foreign origin, naturally tended to complicate the task of distribu-

ting this compensatory work.

For Belgium the aerospace work would involve building a major portion of the
airframe plus final assembly of the Belgium aircraft at SABCA and Fairey.

For the Viggen' s RM8B engine, Fabrique Nationale had signed an agreement which
would allow it to produce the majority of the engine parts and assemble the
complete engine. For offset work external to the Viqqen, the setting up of a
new Volvo facility in Belgium as well as considerably increased production
from existing plants in the automotive and electronics fields was offered.

Production of the electronic, hydraulic and mechanical equipment, both of Swedish
and foreinn oriqin, would be shared between Belgian and Dutch industry.

Chapter 12
B-30

If the Netherlands selected the Viggen, Fokker would assemble the Dutch air-

craft and have a major share in manufacture of the airframe.

By late summer 1974, the Swedish offset package had been restructured so as to
deal with a firmed up commitment by the Danish and Norwegians to participate
in the multi-national program. In order to counter balance the lesser pros-
pects for third country sales, that the Viggen offered, the Swedes also came
to rely very heavily on external offset. At this stage the Swedes were offering
the Netherlands 160% of the value of their purchase in offset orders, the Belgian
200%, the Norwegians 120%, and the Danes 100%.

In early 1975, Sweden again raised the ante with additional compensatory induce-
ments to consortium industries including an increase of the Danish offset to
150%. In addition Swedish aircraft, automotive, and electronics firms (Saab,
Volvo, and Ericsson) would finance a ten-year, billion dollar program of indus-
trial development in the four countries.

As far as the participation in the production of the aircraft is concerned,
the table below shows the percentage of work breakdown within NATO by country:

Airframe

Enai ne

■i —

c
o
•1 —

Belgium

Denmark

Netherlands

Norway

Others

The list of participating

companies in

such proposed offsets

includes: Air-

frame— Fokker-VFW, SABCA, Fairey, VFW-Fokker, Per Udsen; Avionics— Hoi landse
Signaal, Philips, Sybelec Group (MBLE, etc), Siemens, Bruel & Kjaer, Terma,

Chapter 12
B-31

Kongsberg, Nera; Engi ne— Fabriaue Nationals, VMF, Hollandse Signaal, DAF, Duiker

Apparaten Fabrik, Philips, Artillerie Inrichtingen, Enraf -Nonius, MTU, Nordentoft,

Bola, Disa, Kongsberg. For equipment, companies from. . .the four consortium

countries plus British, U.S., and German firms. Belgian and Dutch firms were

also being guaranteed al least a 50% share of production work on any third

country sales of the Viggen.

There was also external non-aerospace work, (also referred to as parallel or
indirect offsets).

In March, 1975 the Swedes, French, and American offered what were to be their
final proposals. In this final round the Swedes again substantially increased
the external industrial offsets. The industrial program guaranteed by Saab-
Scania, Volvo, and L. M. Ericsson in addition to the direct industrial partic-
ipation would amount to $980 million in work to the Netherlands and $1.62 bil-
lion to the Belgians (the significant difference stemming from Belgium's greater
industrial capabilities). Saab claimed that the income to the two states gener-
ated by this proqram and the avoided unemployment would be equivalent to a net
cost reduction of $470 million to the Dutch government and $800 million to the
Belgian government, or a reduction in the price of their aircraft of 48%, and
73% respecti vely. To both Denmark and Norway the similar case was made, but
one involving smaller numbers due to their industries offering less in the way
of possibilities.^

Earlier in the same month, March, the Swedish government had refused to pro-
vide firm guarantees to the consortium against unfavorable inflation and cur-
rency exchange rates, and instead Saab-Scania revised its original proposals

Chapter 12
B-32

to the four to incorporate a total package price reduction of between 8 and 9%

primarily through simplification of the equipment package.

In addition Saab-Scania countered with the argument that the escalation of

income generated by the contracts would almost entirely offset the impact of

inflation on the aircraft purchase contract in Belgium and the Netherlands,

due to the larae aerospace and non-aerospace industrial offset programs.

Fluctuations in currency exchange rates would not affect expenditures to any

great extent either, since 80% of the price of the aircraft would be paid in
42

native currencies.

Saab-Scania also claimed that though its purchase price would be higher, lower
operating costs than either competitor would involve a saving of between $700,000
to $1.25 million per aircraft over 15 years of service life.

So as to counter concerns of Sweden not being a NATO member, the Swedish gov-
ernment had issued a letter the previous December to the 4 consortium coun-
tries, guaranteeing delivery of Viggen components. In March, a further arranoe-
ment was proposed under which special spares stockpiles would be established
in client countries to eliminate the possibility of interruption in deliveries
of spares and components.

Chapter 12
B-33

4. MO U and Project Management

As of May 1975 the USAF had commited itself to fulfilling the DoD's offer to
the government consortium, if the F - 16 was selected. The four European
countries ultimately committed themselves one by one between May 30, and June
10, 1975 when the selection announcement was followed by their signing of the
Memorandum of Understanding.

Over the period from late fall 1974 until ultimate execution by the Secretary
of Defense for the U.S. on 10 June, 1975, the MOU had become the principal
working document laying out the fundamentals of the multinational program.
Critical among these were the terms of the European industrial participation
negotiated under the duress of competition with the French and Swedes, covered
in the previous section. The signing of the MOU was then to be followed by
the signing of 4 individual Letters of Offer and Acceptance (LOA's) along the
lines of standard FMS procedures for a government-to-government sale.

Chief U.S. Negotiator, Frank Shrontz, had relied on a nucleas of 10-12 experts
from the DoD - representing legal, technical and security - to provide conti-
nuity and balance during these negotiations. A draft version of the MOU was
drawn up by the SPO and had been provided informally to the Europeans to serve
as a departure point. In the words of Shrontz:

We had a half-dozen negotiating sessions here and in Europe.

We tried to raise issues and answer them over and over. We
came up with a Memorandum of Understanding that all five could
sign as a preliminary contract. ^

The MOU thus came to serve as the basic charter for the F- 16 program. Consti-
tuting a de facto contract, the MOU committed the U.S. Government to the
fol lowi ng:

Chapter 12
B-34

Procurement of a minimum of 650 F-16 aircraft, of which a sub-
stantial number would be stationed in Europe.

Providing EPG industrial participation in F-16 production to off-
set EPG procurement costs. Production and assembly contracts are
to equal at a minimum 58% of the procurement value of the 348 EPG
aircraft purchase costs, with additional offsets to come from
third country sales and possibly further USAF and EPG orders.
(While the term procurement value was defined, the terms used in
the definition were not settled, leading to future problems.)
Assuming "reasonably competitive" prices (another term which is
not well defined in the MOU), the DoD agreed to direct the F-16
prime contractors to place with EPG industry:

- 10% of the procurement value of USAF F-16 aircraft, totaling
originally 650 aircraft;

- 40% of the procurement value of all EPG F-16 aircraft;

- 15% of the procurement value of all third country F-16
aircraft;

Management of the Multinational Fighter F-16 program.

An estimated not-to-exceed price of $6. 091m (FY 75 S) for the EPG
aircraft.

Chapter 12
B-35

- Utilizing depot maintenance and overhaul facilities established
•and funded by EPG (and industries in those countries) on a mutu

ally agreed basis for USAF F-16 aircraft operated in Europe.

The complete MOU was constituted by the following sections:

Section A

The Cooperative Program

Section B

The Steering Committee

Section C

The Program Charges and Payments

Section D

The Production Program

Section E

Contracti ng

Section F

Technical and User Rights

Section G

Securi ty

Section H

Third Country Sal es

Section I

Accession of Additional Governments

Section J

Taxes and Duty-Free Entry

Section K

Release of Information to the Public

Chapter 12
B-36

Section L

Industrial Participation

Section M

Contract Administration Services

Section N

Test Facilities

Section 0

Configuration Management

Section P

Termi nati on

Section Q

Reduction

Section R

Non-recurri ng Cost

Section S

Further Cooperation and Implementation

Section T

Language

Section U

Effective Date

Annex A. Reasonable Competitiveness.

Supplement No. 1. Shifting of fixed rates of exchange as of January 13, 1975

to June 6, 1975. 46

Upon selection of their common fighter, the four-nation steering committee
that had originally been formed to evaluate the various candidates, evolved

Chapter 12
B-37

into a five-nation committee including U.S. representation. This expanded
Steering Committee, established by the MOU is the chief advisory body for the
program, insuring that the terms of the MOU were met. Primary among these was
approving co-production manufacturing plans in compliance with terms of the
MOU, vis-a-vis offset. The Steering Committee's other tasks were approval of
arrangements covering: cost sharing for configuration changes and contractual
services; currency management; and the development of a coordinated opera-
tional and logistics support plan encompassing the F-16's of all five air
forces .

It is important to point out, however that, unlike the normal 'NATO* Steering
Committee, the F- 16 Steering Committee is not responsible for direction of
the program. Direction comes down from the U.S. DoD to the ASD and the SPO.

As of spring 1977 the Multinational Steering Committee was headed by the
Assistant Secretary of the Air Force ( I&L) and included the five national
representatives:

- A USAF Major General, director of development and engineering in
the office of the deputy chief of staff for research and
development;

- A Belgian Major General;

- A Dutch Major General;

- A high level civil servant from Norway, and;

- A Danish Rear Admiral.

The committee meets at least quarterly.

Chapter 12
B-38

Its major subcommittees are:

- contractual and financial;

- industrial;

- operations, and;

, . .. 48

- logistics.

The USAF SPO actually manages the program, receiving direction from the DoD
and advice from the Multinational Steering Committee. As mentioned above,
unlike the standard NATO Steering Committee - national program office rela-
tionship, policy guidance and overall direction do not rest with the F- 16
project's Multinational Steering Committee.

From the SPO1 s initial manning level of September 1971—17 with one colocated
engineer— it had reached 302 by early 1977. This growth represented an
evolution of the SPO from a small program office whose role was simply to mon-
itor the contractors technical, cost and schedule performance by drawing on
functional specialists as needed, to one whose greatly increased importance,
dollar value, and complexity required a tightening of the management reins.

On this point General James Abrahamson, F-16 program manager had this to say
in an interview published in the May 2, 1977 issue of Aviation Week & Space
Technology:

This is by far the most complex program in the Defense Department,
probably the most complex in history. It is a management nightmare.

It would be the biggest single mistake to keep the SPO too small.49

Chapter 12
B-39

Of this level of 302 military and civilian employees (reaching 350 by early
1978), 48 were dedicated to consortium and other FMS activities. These 48
positions were paid for by the 2% “MS administrative surcharge in the LOA's.

The European Participating Government (EPG) personnel attached to the SPO at
Wright-Patterson Air Force Base, Dayton, Ohio, numbered around 20 as of mid-
1979 and operated as if they were USAF personnel.

Due to the F - 16 ' s Pratt & Whitney F100 engine having been ini ti al ly developed
for the F-15, the engine was managed by the Joint Engine Project within the
F-15 Program Office (ASD) up to October, 1977. After October F100 management
was shifted to the Propulsion Systems Program Office, the office which will
ultimately manage all USAF engine procurement.

Contrac^ng with the two SPO 1 s are the two Primes, General Dynamics for the
airframe and Pratt & Whitney for the engine. The total system performance
responsibility clause in GD's contract, while modified with regards to the
F-100 engine, commits the contractor to manage the total subcontract effort
including final assembly and flight test in Europe through the following
language. . .

The contractor hereby accepts total System Performance Responsibil-
ity for the Air Combat Fighter System whether or not such Systems
(or subsystems and components thereof) are fabricated, manufactured
or assembled in the Consortium Country. 50

Ordinarily surveillance of the prime contractors management of its subcon-
tractors is carried out by the cognizant government contract administration

Chapter 12
r_40

(AFPRO) office located at the prime contractor's facility. However, with a
major part of the subcontract effort taking place in the 4 EPG's, program com-
plexities and U.S. government responsibilities were such that special measures
had to be worked out covering the division of those responsibilities to be
delegated to the 4 EPG as well as those shared between the Air Force Systems
Comnand (AFSC) and the Air Force Logistics Corrmand (AFLC). This required the
negotiating of Technical Agreement No. 1 to the MOU between the U.S. gov-
ernment and the 4 EPG's, and a working out of a memorandum of agreement
between the AFSC and AFLC, both of which will be treated shortly.

Chapter 12
B-41

5. Waiver of U.S. Government P.eroqatives and Negotiation of the

LOA1 s

With the general nature of the intergovernmental , contractual and industrial
framework having been agreed to in the MOU negotiations between the U.S. and
the European governmental consortium, then came the task of working out the
specific details of implementing the multi-national program.

For starters, in order to be responsive to the needs of the four European
allies, the Air Force had structured, negotiated and awarded the F -16 con-
tracts in a compressed time frame. In addition to this, the airframe contract
had been awarded by the USAF to GD some five months prior to the signature of
a finalized MOU (and one that left a number of issues either unaddressed or
unsettled) .

The U. Sr signing of the MOU was accompanied by the signing of four preliminary
bi-lateral contracts executed by each of the EPG's with the US government.
These were to be replaced by conventional Letters of Offer and Acceptance
(LOA's) within a 90 day period. Nearly 18 months passed, however, before the
draft LOA's were completed and a total of 23 months before they were actually
signed .

Given the interrelationship of these three sets of documents, the unavailabil-
ity of adequate time, the lack of a logical sequencing of events, gaps in the
MOU, and more generally the lack of the relevant prior experience that would
have allowed the framers of the program to foresee and deal effectively with
many of the problems, it is not surprising that there was a certain amount of
program disruption and delay.

Chapter 12
B-42

Among the large number of outstanding issues responsible for the 18 month
delay in signing the LOA's, most centered around the extensive negotiation
required for the ironing out of paynent schedule for the aircraft and business
differences between the U.S. and Europe. The resolution of most of these
problems simply took time, as problems were surfaced and dealt with
individually until they were resolved.

The government-to- government negotiations over payment schedules, and finance

generally, will be covered later in section 9. Even though the program

operated within the general US defense contracting framework, the USAF Program

Manager, General James A. Abrahamson, made the following observation with

regards to the impact of its being a multi-national venture on the manner in

which program agreements and contracts have been negotiated and implemented.

In all aspects where differences have been encountered the govern-
ments and/or the contractors have been required to negotiate a solu-
tion. The US cannot impose its procedures or standards on European
industry. The result is normally a compromise in which both sides
must alter their normal approach or treatment to some degree.

Multinational agreements had to be negotiated concerning the application of

the Armed Services Procurement Regulations (ASPR), Cost Accounting Standards
(CAS), quality assurance standards, configuration management, contractual and
technical audit procedures, exemption of taxes and duties, termination, lia-
bility for patent infringements, liability for ground/flight damage, currency
exchange and price escalation, progress payments to contractors, and a multi-
tude of other F-16 program aspects of multinational concern. This naturally
also involved a considerable amount of inter-agency/branch negotiation within
the individual national governments such as U.S. congressional waiver of the
specialty metals clause. Needless to say, all this had a major impact on
industrial efforts to get production set up in Europe. In the words of
Program Manager, General Abrahamson:

Chapter 12
B-43

Terms and conditions of contracts between the USAF and US
industry must be passed on to European industry. Negotiation
of these terms and conditions was accomplished, but with con-
siderable difficulty. In many instances these negotiations
were successfully completed only after reaching agreement at
the Government-to-Government level on general principles of
policy.

The approach worked out was one whereby standard U.S. Government contract lan-
guage, terms and conditions were used with specific Armed Services Procurement
Regulations being exempted from flowdown provisions to foreign manufacturers,
where appropriate. In some cases this required legislative relief, in other
cases it was accomplished by blanket Secretarial waiver to the Armed Service
Procurement Regulations. In the words of chief U.S. negotiator. Assistant
Secretary of Defense Frank Shrontz:

There were more problems than we anticipated. We learned that
we have to look at compromises in working with the Europeans
and not force them to accept our armed services procurement
regulations. They made more compromises because we are bound
by statute. They are more flexible. We must have arrangements
on duties and plant cognizance. We can't expect them to
blindly follow our practices. We should have been more realis-
tic in our timing. 54

The exercise by the U.S. Government of its perogatives in the areas of Cost
Accounting Standards (CAS), audits, and specialty metals constituted particu-
larly difficult problems for governmental managers. Faced with strong Euro-
pean resistance to the routine flow-down of ASPR clauses from GD and Pratt &
Whitney to the EPG subcontractors, U.S. negotiators opted to make four con-
troversial clauses non-appl icable to the Europeans in the GD contract:

Examination of Records by the Comptroller General; Audit by the Department of
Defense; Cost Accounting Standards (CAS); and. Preference for Domestic

Chapter 12
B-44

Specialty Metals (Major Programs). The Pratt & Whitney contract made non-

applicable all but the Cost Accounting Standards Clause.

Following unsuccessful attempts by Air Force negotiators to obtain waivers

from GAO and CAS Board, these two authorities discovered in August, 1975 that

the clauses had already been uni lateral ly waived. On 11 August, 1975, in his

dual role, the Comptroller General of the United-States and Chairman of the

Cost Accounting Standard Board objected in strongly worded letters to the

Secretary of Defense.

The letters had the desired affect and the requirement to flowdown the clauses
was reinstated in both contracts. The European consortium nations, however,

would not agree to accept these contractual provisions without modification.

A meeting of the newly formed Multi-national Fighter Steering Committee was
called for 23 September, 1975 to address the issue. The U.S. negotiators
offered a draft proposal which would permit joint audit by the GAO, the
Defense Contract Audit Agency (DCAA) and the official audit agency of the
country in question. The Europeans objected, insisting that the sole right to
audit should reside with their seperate audit agencies. A stalemate prevailed
until January, 1976. The final resolution, Technical Agreement No. 1, was
signed in March, 1976. Key elements of the agreement are:

1. GAO and DCAA will exercise their audit rights for subcontracts
placed in the four EPG countries through their official EPG
counterpart.

Chapter 12
B-45

2. GAO and DCAA are entitled to designate "audit representatives" to
accompany the EPG auditors doing the work. Similar rights are pro-
vided the EPG auditors with regard to GAO and DCAA audits of U.S.

f i rms .

3. Under "exceptional circumstances", DCAA and/or GAO may decide to
audit directly. The decision to do so can only be made by Senior
U.S. DCAA or GAO officials; this decision may then be appealed by
the Head of the EPG audit agency to the Director, DCAA or Comp-
troller General, as appropriate, who will make the final decision.

4. The EPG audit agencies will develop audit programs, procedures and
standards which reflect U.S. audit agencies interests and concerns.

5. European audit reports will not be disclosed to "third parties"

without country and sub-contractor approval.

Agreement on the Cost Accounting Standards was less difficult. At a November,
1975 meeting of the Price and Audit Sub-committee, with representati ves of the
CAS Board and EPG companies present, all parties agreed on the wording of a
memorandum. The governments and industries of the five countries agreed to
accept application of the CAS Standards then in effect (CAS 401-407).

Additional Standards have since been enacted, however, and these new standards
(CAS 408^15) automatically become a part of any new order placed under the
G.D. and Pratt & Whitney prime contracts. The EPGs refused to accept appli-
cation of the new CAS provisions to industries in their country and, in fact,
attempted to reopen the subject of CAS 401-407. The DoD was caught between
the EPGs saying their sovereignty was being violated by imposition of U.S.
law on their businesses, and the GAO and CAS Boards who are reluctant to waive

Chapter 12
B-46

their rights to examination of contractor records and right to audit where

U.S. appropriated funds are involved.

The U.S. Code requires that certain specialty metals be procured in the U.S.

for those weapon systems purchased with appropriate funds. Under the MOU, any

European subcontractor purchase directed to be made in the U.S. does not count

as part of the offset. Consequently, applying this clause has a negative

impact on the contractors ability to meet their offset commitment; as well as

the ability of the U.S. Government to satisfy its own commitment. Ironically,

the EPG producers would often have had to buy the material in the U.S. in any

event since the only source available was in the U.S. (For the NATO

Seasparrow project dating from several years earlier, the U.S. had been able

to adroitly side step this issue and its impact upon creditability at lower

tiers in a project involving the same four European countries plus Italy.)

The Air Force hadn't many options. Getting the law changed would
take too long, as would obtaining a waiver. The short term solution
arrived at was direct citing EPG funds thus avoiding the use of U.S.
appropriated funds. Specialty metals required by the EPG subcon-
tractors were purchased citing monies held in this direct cite trust
fund. The long term solution was a waiver of the specialty metals
provision which was contained in the FY-78 Appropriation Act and
made applicable to all programs which support NATO
standardi zation .60

The basic problems associated with audit, examination of records and CAS are
essentially the same. The DSMC study had the following statement on this
subject:

The EPG's took exception to all three requirements based on the pro-
position that since this was to be a cooperative arrangement the USG
should not impose its laws, or requirements , upon the participating
industries of the other countries. They feel, that; the clauses
duplicate functions already existing in their countries, they should
not be subjected to the scrutiny of U.S. agencies, that accounting
systems would have to be duplicated, and that we would be usurping
their national prerogatives. These remain sensitive issues with the
EPGs. 61-

Chapter 12
B-47

The di lemna was such that, if G.D. attempted to flow down the provisions to
European subs, they could simply refuse to participate, while G.D. had
already committed to its make or buy plan. Negotiations between the USG and
EPGs, with the Comptroller General playing a significant supporting role,
resulted in the f orementioned F - 16 Technical Agreement No. 1 which laid out a
compromise position that all parties could agree to. The philosophy of flow-
down, however, was never accepted by the EPGs. They have rejected application
of cost accounting standards published at a later date and continue to raise

the issue of forcing U.S. requirements on contractors of another nation.

Waiver through appropriate channels on a case by case basis is a logical
alternative but the process is time consuming and, since agencies outside DOD
are involved, the probability of success is always questionable. Legislative
relief for programs involving cooperative effort between the U.S. and our NATO
allies -4s another possibility. It has the advantages of resolving the issue
on a permanent basis and gives the contracting officer firm criteria under
which to structure his contract. However, as stated in the DSMC study:

We should approach this area with caution, since waivers of these
controls do not relieve the Program Office and the Contracting
Officer of assuring that public funds are spent properly. We may
not desire blanket waiver for NATO. This may leave the Program
Office in an untenable position since controls differ from country
to country and in some cases may not be adequate to assure the Pro-
gram Offices that prices from European subcontractors are fair and
reasonable or that funds expenditures match the level of work
progress. While legislative relief appears to be the most effective

way to satisfy our European partners and solve our MOU i
creates a dangerous environment for the Program Office.1

iroblems

Another alternative is to negotiate a compromise position as was
done on the F - 16 and it appears that, while this requires the most
effort and time, it may be the most desirable course of action for
all concerned. Moreover, if negotiating a compromise position is
the course of action selected, the contract should not be negotiated
until the details of such an agreement are finalized. 64

Chapter 12
B-48

The preliminary contracts between the four EPG's and USG were signed on June
10, 1975. These allowed the USAF to proceed immediately with the activation
of the European Contractor Operation, including duplicate production tooling,
long lead items and other administrative costs. The terms of the preliminary
contracts were that within 90 days the U.S. government would present the
Letters of Offer and Acceptance ( LOA) , and the EPG's would sign within 60 days
of receipt. These preliminary contracts included only average "flyaway" costs
for 348 EPG aircraft at the Not-to-Exceed value of S6.091 million (FY 1975 S) .

As things turned out, the Draft LOA's were not completed until November, 1976,
and signed the following month, some 18 months after the signing of the MOU
and the preliminary contracts. The principal difference of a substantive
nature between the preliminary contracts and the LOA's, and one that three of
the EPG's found disturbing, were the budget and funding problems caused by
unexpected increases in funds called for early in the program by the LOA's.

Chapter 12
B — 4 9

6. MOU Work-Sharing Definition Problem

Faced with the competitive offers of the French and Swedes, with regards to
fixed prices and high guaranteed offset commitments, the U.S. negotiators of
the MOU found themselves in a difficult situation. The U.S. government could
not legally guarantee a maximum cost. But since the MOU took on the character
of a contract, it's provisions as such, would be considered binding on the
signatory governments.

However, despite the compression of the transition period which effectively
mandated gaps in program definition, the F-16 SPO did have a relatively good
cost-projection baseline at the time the four EPG's joined the program.

In negotiating the wording of the section of the MOU covering price, the EPG's
insisted on binding terminology, while the U.S. negotiators had to resist mak-
ing specific commitments on cost since this remained uncertain, being esti-
mates only. Ultimately, the compromise language agreed upon was a not-to-
exceed (NTE) price, that included all elements except for the radar, and GFAE.
Additionally, Section 0 of the MOU covered arrangements for configuration man-
agement that would provide significant leverage in controlling cost growth.

Any program changes impacting on the NTE price would have to be negotiated and

approved unanamimously, or funded solely by the nation(s) requiring it.

The U.S. negotiators also resisted placing a guarantee on the offset figures.
The U.S. finally agreed to make a 'commitment', a word that was viewed by the
EPG's as a promise, but by the U.S. government as "best efforts to meet a
goal".70

Chapter 12
B-50

First of all, the percentages of the offset formula, were carefully considered

estimates of what could realistically be expected from the EPG manufacturing

community based upon contractor projections in their make or buy plans.

Nevertheless, they were estimates which had no historical precedent to lean on

as a basis for extrapolation. The only caveat associated with this offset

commitment was the proviso that EPG manufacturers had to offer "reasonably

competitive" terms. The term reasonably competitive has not been defined in

finite terms. It was originally left to the Prime Contractor to determine

whether or not a bid was "reasonably competitive." Had the normal ASPR

provisions of price reasonableness been applied, the European co-production or

offset would have been almost nonexistent. The conscious U.S. decision not to

better define "reasonably competitive" early in the program in order to

provide flexibility in meeting its offset commitments led to a dilemma, since

the EPG~ viewed the NTE price as sacrosanct but insisted upon the USG meeting

co-production and offset commitments.

With the term "reasonably competitive" not concisely defined, GO, found itself
being required to pay substantial premiums for certain items in their effort
to meet the 10/40/15 offset formula, and therefore caught between a fixed
price and higher costs. In paying these premiums GD, with U.S. government
concurrence, pushed the fly-away cost dangerously close to NTE price for the
aircraft

Eventually, GD reached the point where it would have had to push the cost over
the NTE price were it to pay the premium required to close the final gap.

Chapter 12
B-51

To further complicate the matter, there were several points of ambiguity in
the computing of the unit procurement value and therefore the amount of offset
required. First of all, based on the 10/40/15 formula, the U.S. agreed in the
MOU to a minimum of 58% of the value of the four EPG's F- 16 aircraft procure-
ment. This figure of 58% was derived as follows:

Let X = Unit procurement value; then

USAF aircraft contribution = 10% * 650X - 65 X

EPG aircraft contribution = 40% * 348X s 140X^

Total 205X

and with the total procurement equaling 348 aircraft, or 348X

205X

the total offset percentage = _ 53%

But this' calculation is deficient in that it assumes equivalent costs for
USAF(X^) and EPGU^) aircraft. Even with a standard configuration for these
five NATO Air Forces F-16's, with four times (40:10) as much of the EPG air-
craft being produced on a second source basis in Europe in comparison to the

USAF aircraft, the EPG aircraft would naturally be more expensive.

This differentiation of X, applied to 3rd country sales as well, where 15% of

each aircraft was to be of EPG content.

USAF negotiators recognized the fact that this was an approximation
and that it reflected a higher guarantee than if a more accurate
figure were used. However, the magnitude of the X could not be
determined at the time of negotiations and both Northrop and General
Dynamics had expressed a high degree of confidence that they could
achieve roughly a 67% offset percentage with no problem. Further,
we did not survey European industry ourselves to determine their
capabilities but relied totally on the contractor's make or buy

Chapter 12
B-52

plans. The EPG made a strong pitch to secure a 100% offset commit-
ment and pointed to the French offer in order to solidify their
case. In view of these facts the 58% approximation and subsequent
commitment are understandable.^

In addition to this Xp and X3 differentiation based on the cost impact of
the three different percentages of second source European content, there was
also a problem in defining what items were to be included in the procurement
value, 'X1. The MOD stipulated procurement value to mean the dollar value of
aircraft fly-away cost, plus initial spares, AGE, data, training equipment,
and the pro-rata charge for non-recurring cost.'7'7 A problem arose, however,
in that these terms used to define procurement value in the MOLJ, were not
themselves defined.

National concepts of what constitutes initial spares levels, required AGE,

data and training equipment varies substantially from country to country. The

June, 1978 DSMC F - 16 study stated that:

We have not yet reached agreement on any of these values and as a
result we have a floating baseline on which to compute procurement
value and the change in required offset is significant. Until we
set these figures the actual magnitude of our offset commitment or
shortfall will not be known. ^8

In addition, the term "third-country sales" itself needed to be better
defined. For several years following the signing of the MOU there was dis-
agreement over two points of interpretation that had to be dealt with by the
Steering Committee.

One, did the 15% of third-country sales mean all such sales in the strict
sense or just 15% of that amount of such sales left to U.S. industry after a

Chapter 12
B-53

certain amount of the aircraft had been produced in the third country. The
latter interpretation eventually prevailed. The second point concerned
whether and under what conditions the Europeans would have the right to pro-
duce 15% of third-country sales once total offsets had reached 100% of the
original purchase value of the aircraft.

All the ambiguity not only clouded the government-to government commitments in
implementing the MOU , but also complicated the issue of contractor responsi-
bilities vis-a-vis offset.

As previously stated, the contract between the USAF and GD which was signed in
early 1975 antedated the signing of the MOU between the governments by several
months. Section J, Provision 1 of the contract stated that GD "would. . .enter
into contractual arrangements with consortium manufacturers acceptable to and
approved by the U.S. government and the Consortium, which will permit the
establishment of the capability to fabricate and/or assemble aircraft, sub-
systems, or components called for under this contract in an amount equivalent
to the..." 10/40/15 formula. The provision, however, did not mention the 58%

offset since the earlier versions of the MOU then extant did not commit the
U.S. government to the 58%. Quoting the DSMC F-16 study, "On the surface, it
would appear that we could hold the contractor responsible for meeting the
10/40 and 15% commitments, however, several factors enter into the issue of
enforceabi lity."

If we insist upon GD meeting the provisions of Section J, Provision
1 of the contract we would first have to settle the issue of which
procurement value applies as "contract procurement value." Settling
that question could be a very difficult task if our position was
different from that of GD. Assuming we could settle the issue of
which procurement value to use, we would have to determine if GD had
met the percentages they signed up for in the contract. Then, if

Chapter 12
B-54

they had not, we could attempt to force GD, possibly through with-
holding of progress payments, to meet the percentages called for in
the contract. The problem then would be staying within the NTE
price. Many of those familiar with the F- 16 program feel that we
could meet the commitments for co-production and offset but that the
cost would raise the price to the U.S. and exceed the flyaway cost
NTE. The provision is, therefore, for all intents and purposes not
enforceable in our contract with GD.

In summary, several factors led to our current position concerning
offset and co-production as they apply to the contract.

(1) While the term procurement value was defined, the terms that
made up the definition were not precisely defined leading to a
shifting base on which to figure co-production percentages.

(2) Reasonable competitiveness was not precisely defined and no
direct relationship between reasonable competitiveness, Not-to-
Exceed prices, and co-production or offset percentages was
established in the MOU. If a relationship had been included
which tied co-production commitment to reasonably competitive
prices or a flexible NTE based upon how much extra the EPGs
were willing to pay for co-production our relationships with
the EPGs concerning those matters would be much more cordial.

(3) Due to time constraints the Program Office had to structure the
contract with the best information available and there was no
MOU to refer to. Therefore, the contract suffers from the

— shortcomings in definition and detail that are present in the
MOU. The real lesson to learn here is that if we must leave
terms loosely defined in order to satisfy the political pres-
sures inherent in dealing with foreign governments then we must
expect problems in the program later on either with the con-
tractor or the foreign governmemt. The contract can only
reflect the conditions as the negotiators understand them at
the point in time the contract is signed and no amount of care-
ful wording will transfer the burden of an ill defined set of
conditions to a contractor. Certainly, we should not agree to
set percentages of an ill defined dollar value for co-produc-
tion commitment nor should we tie ourselves to an NTE and co-
production figures without firm criteria for determining when
foreign industry has priced itself out of the program.™

same study further stated...

It is unlikely that the offset agreement can be met within the F - 16
program. There is some doubt that it can be met at all. Fulfill-
ment of the commitment milestone is "on or before the delivery to
the U.S.G. and the EPG of the 1,000th F- 16 aircraft and/or AGE,
initial spares, etc., whichever is later. The USG fulfillment of
the 80% target offset reached on assumed third country purchases of
500 F- 16 aircraft (total purchase of 1500) shall also be progres-
sive." Any offset commitment poses a significant management problem

Chapter 12
B-55

but we must assume they will be required on future programs and that
no matter how we try to hedge on words the Europeans will look upon
the numbers we offer as a guarantee.

On the basis of the F - 16 experience the DSMC study made the following recom-
mendations for future co-production programs concerning the MOU and the role
of the program manager.

Since Memoranda of Understanding have assumed the force and effect
of a contract, it is imperative that great care be exercised in the
construction of these documents to ensure that what is being
promised can be done. In this regard, it is strongly recomnended
that the accountable agent for accomplishment (normally the Program
Manager) be a member of the team negotiating the MOU.

The MOU should be a top-level document which establishes general
aims and interrelationships. It should incorporate a provision for
the establishment of an executive body, such as the F - 16 Steering
Group, to work out the necessary implementation details.

The Program Manager should be provided direct access to the Steering
Group, the U.S. Steering Group Member and Decision Maker. This
provision will likely cause elements of the normal administrative
chain of command to be bypassed. However regrettable this may be,
the Manager is the focal point for action items and an abbreviated
reporting chain is necessary if he is to be able to respond in a
timely manner. . .

A separate charter clearly defining the scope of his authority and
responsi bi 1 i ty should be provided the Program Manager of any multi-
national program such as the F-16. The charter should ensure that
the Program Manager is the focal point for all matters dealing with
contract execution but must also make clear that the Program Manager
is not able to commit the U.S. Government .30

All things considered— that the Air Force had to structure, negotiate and award
the F-16 contracts in a compressed time frame; that the selection of a fighter
and the signing of the MOU continued to slip over the subsequent 5 month
period; and that the co-production contracts and the signing of the LOA's were
to be completed within the following six month period, when in fact, they took

Chapter 12
B-56

a year longer than planned— the five governments concerned can be credited
with having done an admirable job of pulling the program together.

The DSMC Study offered the following commentary on their dilemma:

"In summary the major lesson from a contract point of view is that
we can operate in a very compressed time frame but we must expect
major turbulence in the program as it progresses. If the political
arena is such that in order to be responsive we must disregard cer-
tain basic principles of contracting then management must be pre-
pared for problems in contract i nterpretation, delays in processing
contractual actions and questions regarding contract enforceabil-
ity."81

Chapter 12
B-57

7. Configuration Management Control

a . Configuration Control

Among the most difficult challenges facing the program was configuration man-
agement. Configuration control and standardization are always critical ele-
ments in maintaining cost and schedule goals through all places of a project.

A dilemma results as operators press to optimize the performance of the sys-
tem, while program managers struggle with keeping the product at cost. The
impact of "user" inputs for configuration changes in a multinational program
can be a severe problem.

The Europeans entered as full fledged partners on the government side of pro-
gram in June, 1975, upon execution of the MOU and the preliminary contracts,
several-months after full scale development had commenced.

These preliminary contracts contained changes each of the new part-
ners wanted in order to tailor their version of the aircraft to meet
their own peculiar requirements . By the time the Europeans entered
the program, however, the F -16 had three years of engineering defi-
nition behind it and any change carried with it a significant price
tag which the country or countries proposing the change had to pay.

The cost factor rapidly reduced the shopping list. 78

Upon the arrival of the teams at the SPO of several national representatives
from each EPG, the Senior National Representative of each team was made a mem-
ber of the F - 16 Configuration Control Board. This Board was charged by the
USAF chief of staff with deciding on the acceptability of changes proposed by
the contractors and user air forces while maintaining design-to-cost goals.

It was chaired by the deputy chief of staff for R&D, included key representa-

Chapter 12
B -58

tives from U.S. user and support commands, and was expanded to include the

Europeans. In the words of the Program Manager, General Abrahamson: "This

body thoroughly scrubs new requirements and adds real discipline to the F -16

acquisition effort."

With five air forces involved, keeping the aircraft identical was problematic,
but in time, changes were reduced to a handful, and fell into three categor-
ies:

(1) Common changes, accomplished in the complete inventory, the cost of which
was shared by all 5 nations;

(2) Country peculiar changes, for which the individual nation bore the total
recurring and non-recurring costs;

(3) Multi-national changes, for which the costs were shared on a pro-rata

basis by two to four nations.

Options that have been incorporated into all 5 nations' aircraft are: sea

clutter elimination from the radar; radar picture freeze; navigation update

capability; a radar electro-optical video recorder; a high technology ejection

seat; back-up fuel control; heads up display symbology; inertial-navigation

system automatic variation insertion; an auto-pilot attitude hold feature for

the radar; and advanced corrosion protection for the radar. Only the last two

of these changes were of European origin.

Chapter 12
B-59

Country-pecul i ar change costs were paid by Norway to equip their aircraft to
carry specified missiles, and to install drag chutes. Denmark and Norway
shared costs to have their aircraft provided with a particular positive iden-
tification system. All other European change proposals were withdrawn when

the cost became known.

Other changes considered but rejected have been: the Harpoon anti -shippi ng
missile, which Norway and Denmark asked to be studied; wind-shield anti-icing,
telebriefing capability, autopilot Mach throttle hold, and weapon certifica-
tion. Also deleted have been a proposed radar altimeter and an instrument
83

landi ng system .

One breach of this preconsultation arrangement with the Europeans for configu-
ration changes occurred in November, 1976, involving the ejection seat. The
ejection seat of the F - 16 had been replaced by another in common with several
other U.S. aircraft, as part of an intra-national standardization effort . Due
to fumbled inter-departmental coordination, the EPG's had been left out of the
loop and found themselves presented with a 'fait accompli'.

The EPG eventually agreed to go along, but argued that the U.S. should pick up
the cost of termination of contracts by itself. The F- 16 SPO pointed out that
it could not legally do this. In the end the EPG's paid the termination cost
of several million dollars, while they received in return aerospace ground
support equipment provisions data for support of their aircraft, legally
satisfying the costs incurred in seat termination.

Chapter 12
B-60

In spite of this, one 'slipped through the crack1 case and the two minor devi-
ations mentioned above for the Scandanavians, the program manager was able to
state in 19 77:

As five sovereign nations go about the detailed analysis of tactical
doctrines, mission usage, and resultant F-16 equipment selection to
meet particular requirements, it might be expected that different
equipage and configuration will occur. This has been true in the
past, when economic and political factors were applied to potential
common programs. This is not the case with the F-16... In addition
to the production economics and operating advantages of a universal
F-16, the benefit in having similar support equipment training
equipment, and maintenance and training philosophy can be applied.
These benefits yield a broader market for support equipment and
allows the quantity increase so necessary for economical coproduc-
tion. Further a pooling of spares and joint usage of depots pro-
vides large potential cost savings over the program lifetime.

The 1978 D5MC study summed up the issue as follows:

Change control in the F-16 has been exercized to a nearly unprece-
dented degree as a result of the small size of the prototype and the
pressure of cost control. 85

Though the EPG's had only a minor impact on the F-16's ultimate configuration,
the overall cost impact was positive, in that the program's multinational
character (combined with the program's advanced stage of development) meant
that U.S. cost problems would also become European cost problems and vice
versa. This served to restrain cost increases for all five nations.

This experience can be contrasted with the configuration control and cost
problems encountered on the NATO .PHM hydrofoil project, which undermined sup-
port in all three participating governments, and eventually contributed to,
the Italian withdrawal in 1974, and later a German pull out in 1977. Only the
U.S. entered series production, and this was for five additional ships (for a
total of six) in lieu of the 30 originally planned.

Chapter 12
B -61

b. The Choice of an ECM System (1979-80)

The first major F-16 system modification (and therefore destandardization)
following the start-up of series production involved the choice of electronic
countermeasures (ECM) system. This involved the issue of intranational versus
international standardization and differing conceptual approaches affecting
trade-offs between the advantages of an externally mounted pod system versus
and those offered by an internal system.

(1) The Belgian Decision

The Belgians were the first to step over the Travis line. In late July 1979,
six months after accepting its first F-16 off the SABCA production line at
Gosselies, the Belgian Air Force selected the internally installed Loral
Rapport_III ECM system for its F-16 fighters. The Rapport (rapid alert pro-
grammed power management of radar targets) was selected over competitive sys-
tems from Sanders Associates/SABCA and ITT Avionics/Bell Telephone Manufactur-
ing Co.

Belgian officials said the decision to use the U.S. -designed internal system
was made after a USAF concept of a podded externally mounted system was dis-
carded by the Belgain.air staff. The Belgain Air Force decided to go with an
internal system because a pod creates drag, reduces speed and creates a hard
point on the aircraft.

Belgian selection of the ECM system was the first adoption of an ECM device by
any of the participants in the F-16 program. No other nation was to join the

Chapter 12
B-62

Out front

Loral has Rapport with the F-16.

Protection is the name of the game. The continuing evolution
of radar directed threats is a constant challenge to our ECM
technology. Loral’s Rapport III system, designed for the F-16,
meets the challenge— now, years ahead of potential alternate
solutions.

Loral is developing the techniques and hardware that will
assure the continued effectiveness of its radar warning and power
management system for the Air Force F-15. It has developed and
enhanced a warning capability to update the radar warning
systems for Navy aircraft. Loral’s new microprocessor will enable
helicopters to operate in increasingly dense threat environments.
These programs are definitive state-of-the-art ECM.

Loral Electronic Systems, 999 Central Park Avenue, Yonkers,
New York 10704, is where it’s at.

electronic systems

Engineers and managers:

Move out front.

Send resume to executive employment.
EOE.

Loral Corporation

AT FARNBOROUGH: South Hall No. 83

Belgians, although several originally expressed interest in the EGM system,
especially with its internal mounting characteristic.^

The Rapport III system employs a crystal video, amplitude comparision radar
warning receiver subsystem for threat acquisition, analysis and identifica-
tion, and has a programmable digital processor to perform power management or
jamming power allocation functions. 87

The Loral system had also been selected by the Belgian Air Force for its
Dassault Mirage 5R and 5BA aircraft. F- 16 selection was in part based on suc-
cessful completion of tests in the Mirage aircraft and an interest in main-
taining intra-national standardization. The first Rapport was installed in a
Mirage 5R in early 1977.88

The ECM_system was to cost about $100 million for all the Belgian F-16s.

Funds were set aside in the original budget when Belgium selected the F-16, so
additional funding was not called for.

Belgian F-16 work was scheduled to begin in the fall when Loral was to submit
its installation plans to General Dynamics. The ECM equipment was to be
tested the following spring.

All Belgian F-16 ' s after the 55th would have the ECM system installed in line
prior to delivery. Earlier aircraft would be retrofitted. The retrofitting
would not entail structural modifications, but would consist of extensive

Chapter 12
B-63

internal work, including avionics modification in the cockpit and center and
aft fuselage. ^9

Belgian officials expressed hope at that time that USAF would join in a coop-
erative development program for incorporating the Loral system into the F-16.
The possible participation of the other coproduction nations was also looked
into. But, as no other F-16 partners could be interested, Belgium had to foot
the bill alone for the non-recurring costs.

(2) The USAF Decision

The debate over the choice of ECM system for the F-16 had also been underway
for some time in the U.S. The Congress had supported greater consideration
being given international standardization and in particular to the Belgian
decision in favor of the Rapport III, while the Pentagon and the Navy sup-
ported another internal system (the Airborne Self-Protection Jammer (ASPJ) and
were trying to get the Air Force to adopt it for the F-16. The Air Force,
however, favored selection of its external ALQ-131 system already under order
for other of its aircraft, i . e . , leaning toward intra-national standardization
as the Belgians had with the Rapport III.

The previous spring the House Armed Services Committee had blistered the Air
Force in its fiscal 1980 report over the service's "indecision on equipping
the F-16 with the ASPJ." While complaining about the proliferation of elec-
tronic jamming systems, the House panel said the Pentagon should look at the
Loral Rapport III in line with the Belgian decision. 90

Chapter 12
B-64

The Belgian initiative had the effect of accelerating decision making in the
U.S. About two months after the definitive Belgian decision to extend its use
of the Rapport III from its Mirage 5 ' s to the F - 16 as well, Air Force Assist-
ant Secretary Robert J. Hermann ( R&D and Logistics) was reportedly seeking to
persuade various Air Force commands to arrive at a consensus within several
weeks on whether the F-16 fighter should have an internal or external elec-
tronic jamming system.

Hermann wanted to nail down the decision on the F-16 1 s electronic countermeas-
ures system in time for the fiscal 1981 budget hearings early the following
year and thereby avoid further congressional criticism of the Air Force on the
issue .

DoD plans called for the ASPJ's adoption as a common system for both the Air
Force aTid Navy and possibly the Army as well. The Navy was committed to the
ASPJ for its F- 14 and F - 18 fighters, and for pod use on the AV-8B. The Army
was also interested in possible application of the ASPJ to its twin-engine
aircraft and small helicopters. Since the Army had been in electronic warfare
a relatively short time it was following the lead of the other services. 91

The three European F-16 nations yet to make a decision received at this time
several presentations on the subject. They expressed an interest in the ASPJ,
but wouldn't make a commitment until the Air Force decided.

Pentagon sources had discounted the Rapport III all along as a real threat to
the ASPJ. The Rapport III could do the job in 1979, they said, but couldn't

Chapter 12
B-65

match the long-term promise of the ASPJ. The latter with an initial opera-
tional capability of 1986 was intended to be capable of meeting the threat out
to the year 2000.

They also pointed out that the Rapport III was designed for the Mirage which
had a smaller radar cross section than the F- 16.

This source called the Belgians "babes in the woods" in the complex and costly
world of electronic warfare and noted that Belgium was the first NATO F- 16
consortium member to strike out on its own in EW. Furthermore, it was sug-
gested that planned coproduction of the Rapport in Belgium may have influenced

the decision. 92

The Air Force for its part was reluctant to commit to the ASPJ for its F- 15
and F-16 fighters. They not only had no requirement for an internal elec-
tronic system, but were having trouble with the fact that the ASPJ would not
be operational until the mid-80's. Source selection between the competing
Northrop/Sanders and Westinghouse/ITT teams was still over a year away. In
the end, the Air Force remained firm in its support for the on-going Westing-
house ALQ-131 comprehensive power management system and selected the system
for its F-16 that fall .

(3) The Dutch Decision

The following summer, in August 1980, the DoD responded to a Royal Netherlands
Air Force request for a Letter of Offer and Acceptance ( LOA) for its F-16 1 s

Chapter 12
B-66

for 13 of the ECM pods with an option for an additional 62 ALQ-13's. The RNAF
counted on rapid pari i amentry approval of its decision with no problem expec-
ted in meeting the October 1 deadline for signing the LOA. 93

The approval process was unexpectedly slowed, however, by a series of reviews
and hearings that rivaled the Netherlands' focus on the Northrop scandals and
on the original selection of the F-16 fighter. The Dutch press covered the
debate in detail. The deadline for the RNAF to sign the LOA had to be
extended initially until mid-October, and then until November 15.94

First, when the RNAF presented the DoD 1 s proposal in mid-September, the par-
liament requested more information. By October 22, when the RNAF had assem-
bled additional data supporting the program a part of the government was sup-
porting the Loral Corp.'s Rapport-III internally-mounted ECM system. On
November 1, Parliament sent detailed questions to the U.S. Air Force on the
ALQ-131, and to the Belgian Air Force for its Rapport III. On November 3
representati ves of Loral, Westi nghouse, General Dynamics and Hollandse Signa-
alapparaten testified before the parliment , and on November 5 a final hearing
was held during which the RNAF was given approval to "react positively" to the
Pentagon's offer. 95

The LOA was finally signed by the Dutch on November 11 at their embassy in
Washington, D.C. and subsequently delivered to the Pentagon.

The ALQ-131 was finally chosen, according to participants in the debate,
because it was already in use by the U.S. Air Force. The bottom line was that

Chapter 12
B-67

the labor party had to back down from its position of support for the Rapport
III because the Dutch defense minister emphasized that it was better to stay
common with the USAF.^^

Supporters of the Rapport III pushed the point that it was less expensive and,
because it would be mounted inside the F- 16 , had less effect on the aircraft's
performance. In addition, they said, it would be better at jamming targets
"above the horizon", and wouldn't be any problem to fit aboard the two-seat
F-16B.97

On the other hand ALQ-131 supporters had been stressing that, besides being a
"fully mil spec qualified" USAF system, no aircraft modifications were
required and deliveries could begin the following spring. They put the price
of an ALQ-131 at $755,000, and said an installed Rapport III would cost
$892,000. 98

Signing by November 15 was important because it allowed the Dutch to get in on
the U.S. Air Force's Lot V buy of ALQ-131 ' s-as many as 140 pods. December 1
was the date of this buy, and it would add to the 288 pods already ordered by
the USAF in four earlier lots. Excluding FMS orders , of which the RNAF's was
the first, some 1100 pods were to be built by Westi nghouse for the USAF.99

Loral had acknowledged one of the criticism’s leveled against their system;
that the Rapport III was behind schedule in its flight test program. Testing
was to have started that month at Eglin AFB, Florida, but had slid to the
following March. The reason for the delay was that the Belgian Air Force

Chapter 12
B-68

wanted to complete all rigorous bench tests and qualification tests before the
flight tests so they would be prepared for an immediate production turn-on.

The slip "was a mutual thing for all parties. "100

Lack of a sale to the Netherlands, a Loral spokesman said at the time, wasn't
a serious setback because the company had "other viable customers" and because
it was cooperating with Westinghouse on the ALQ-131 anyway.

Loral was simultaneously involved in yet another fighter ECM system competi-
tion, this one being in the U.K. The Royal Air Force, although having opted
for a pod ECM system for its newest fighter, the Tornado— the Marconi Space &
Defense Systems Sky Shadow— changed to an all internal ECM system for retrofit
to its earlier Jaguar and Harrier fighters. Loral was teamed with Racal-Decca
and British Aerospace Dynamics, 101 which were competing with two other teams
led by^Plessey and Marconi. The three groups were to submit proposals early
the fol lowing year .

And so it goes in the 'NATO' market place.

Chapter 12
8-69

8. Contract Administration & Quality Assurance

For the F- 16 project effective surveillance by government contract administra-
tion services had to be organized and maintained over several levels and
numerous facets of contractor activity in Europe. General Dynamics and Pratt
& Whitney were prime contractors with total system performance and subcontract
management responsibilities for their respective parts of the program for
delivery to the USG, whether produced in the U.S. or Europe.

Normally carried out on a continuous basis only at the prime contractor' s
facility, surveillance of the prime contractor' s subcontract management effort
is the responsibility of the cognizant government contract administration
office, which in this case was the local Air Force Plant Representative Office
(AFPRO). Here, special measures were required for the division and delegation
of contract production, and contract administrative services (CAS) functions
among the USAF's Logistics (AFLC) and System Commands (AFSC) and the EPG's.

Within the Air Force a memorandum of agreement was worked out between the AFLC
and the AFSC. The AFLC s Detachment 16 of the Air Force Contract Maintenance
Center (AFCMC), is located in the Federal Republic of Germany and has respon-
sibility for contract administration of U.S. defense work in Europe generally,
while the AFSC, its System Program Office (SPO) and the EPG's had worked out
an arrangement which established a European System Program Office (ESPO) to
handle program management in Europe. In addition, the AFSC desired a dedi-
cated contract administration organization in Europe to be responsible for the
F- 16 contracts and therefore established Contract Adninistration Services

Chapter 12
B-70

Europe (CASEUR) as an activity under its AFSC Contract Management Division
(AFCMD). The memorandum of agreement between the AFLC and AFSC provided that:

. ...AFLC will retain their present area cognizance over CAS in the
EPG countries except for the F- 16 contracts to be administered by
CASEUR, and will continue to be responsible for CAS in the rest of
Europe including F- 16 contracts. AFLC1 s F- 16 contracts (Warner
Robins) in EPG countri es will be administered by CASEUR, not AFCMC.
Delegations of F- 16 CAS authori ty to AFCMC s Detachment 16 in non-
EPG countries will be made from CASEUR in all instances where U.S.
CAS is required. Otherwise, the CAS capability of the host Govern-
ment wi 1 1 be used. 102

As the system Program Office at Wright-Paterson Air Force Base, Ohio, ESPO and

CASEUR began to function together, responsible managers recognized that the

ESPO actually duplicated functions of the other two organizations with the

resultant layering of management being counter-productive . Consequently, the

ESPO was subsequently eliminated with its functions being taken over by CASEUR

103

and the-Program Office.

Though resisted at first, the EPG's eventually consented, with the signing of

Technical Agreement No. 1, to CASEUR' s establishing Operating Locations at

their industrial plants for the F -16 program. The Operating Locations were

manned with a mix of US government and host nation personnel under the corn-

104

mand of a representative of the host nation.

One of the points of contention that took several months to hammer out was

over the USG's on site individual exercising of signatory authority on the

DoD's standard shipping/receiving/inspection form (DD Form 250). The EPG's

105

did eventually agree to a US signature.

Chapter 12
B-71

As in other areas, the EnG's objected to the highly structured USG surveil-
lance requirements for quality control being imposed upon their contractors.
Reflecting differences in the European and North American industrial relations
environment, European firms have extremely low employee turnover rates. This
means the European firms can rely on higher skill levels than their American
counterparts who must deal with a more transient society. Utilizing lower
skill levels and having to live with higher manpower turn-over rates, the U.S.
has compensated by developing detailed production instructions and lengthy
written procedures. The Europeans therefore, naturally resent having to pre-
pare and use these lengthy procedures for control of production or quality
that are meant to apply to a foreign environment. The D5MC study reported
that the EPI prepare such procedures as required to satisfy contract require-
ments, but then, generally, place them on the shelf for reference. ^

As with— inspection in other areas, the European governments and industry con-
sented after negotiations to the U.S. sending in itinerant quality assurance
people and utilization of the Allied Quality Assurance Publication (AQAP),
with any additional quality requirements the USG feels necessary being spec-
ified in the applicable contracts. A summary of GD's experience in comparing
the AQAP and U.S. quality documents provided in the DSMC study is shown in the
figure on the following page.

Chapter 12
B - 72

SOURCE: DEFENSE SYSTEMS MANAGEMENT COLLEGE

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The AQAP documents, like their counterpart United States documents, deal with
administrative and management systems, and are not complete operating programs
which can stand alone. They must be supplemented by specific purchase
order/subcontract instructions to assure contract compliance. Individual
assessment of the particular procurement and the selected supplier requi res
individual purchase orders to be specifically tailored to that procurement and
supplier .

The flowdown of AQAP and additional Quality requirements from GD to European
supplies was a requirement included in the contractor's quality program plan
which was incorporated into the F -16 contract.

As of mid-1978 when the DSMC study was completed on the F-16, the use of AQAP
and NATO Standardization Agreements (STANAG) has caused no major problem in
F-16 contract administration. However, since production had not yet pro-
gressed to the point where large numbers of aircraft are being delivered it
was too early to evaluate the effect of using AQAP and European inspectors.

The DSMC study recommended that results experienced by the Air Force be
closely tracked to determine what problem areas arose so that future programs
can make allowances in their quality programs .107

The following provided a little more in the way of specifics. It is derived

from a review by D.D. Burchfield, Assistant for Quality OUSD (R&E) SS,

entitled "Lessons Learned through Review of the F-16 Aircraft Consortium

Arrangement" issued on March 29, 1979.

Allied Quality Assurance Publication (AQAP) #1 was supplemented
extensively on the F-16 program contracts to European subcontrac-
tors . There were some paragraph changes that have little impact on
the quality of the products being produced. The most productive of

Chapter 12
B-73

these supplements were requirements for: non-conforming materials
control; lower tier subcontract controls; configuration management
or engineering change control.

These supplemental controls are essential to any co-development or
co-production program because most of the European nations do not
require these controls in contracts.

As of that time, the NATO Group of National Directors for Qua! i ty Assurance
(AC/250), Subgroup VIII was developing a revised AQAP-1 which would incorpo-
rate these three areas of control. Until the revised document was available,
it was essential that these controls be incorporated in co-development--co-
producer subcontracts.

Burchfield's recommendations on this point were:

(1) DoD Components should not attempt to re-write paragraphs to
supplement AQAP-1.

(2) Contracts or subcontracts to European industry should contain
requirements for non-conforming material, subcontract, and con-
figuration or engineering change controls until such controls

— are incorporated into NATO quality assurance publications.

Not only were U.S. procedures and work instructions superimposed on the Euro-
pean production methodologies, but as we've already seen, U.S. personnel were
sent in to duplicate the quality assurance or inspection functions of the
existing national governments' plant representatives . The resentment caused
by the EPG's feeling that they had the capability to perform such inspections
for the USG, was further compounded by the fact that they would have provided
the services at no expense if not for the U.S. refusing to reciprocate. All
NATO nations, except the U.S., had previously agreed that, as a matter of
policy, quality assurance and inspection services would be provided without

Chapter 12
8-74

charge in procurement between member states. "The failure of the U.S. to
ratify this agreement has been a repeated source of friction within NATO."

Though several of the NATO nations do not currently have this capability, they
are continuing to develop their government source inspection organizations so
as to perform the services for themselves and other NATO and EEC countries.

Quoting the March, 1979 Burchfield review of this situation:

Charging by NATO nations is the exception rather than the rule It

is important and cost efffective to utilize these services wherever
they exi st.1^9

Following the release of this review an Office of the Secretary of Defense
(OSD) study group was formed to evaluate European country capabilities to per-
form various contract management functions throughout Europe. Once the capa-
bilities were known, the U.S. would be able to utilize the services available
and reduce the DoD component contingents in Europe that were being utilized
for this purpose .

A major political impediment was cleared from the DoD 1 s path in October, 1979,
when Congress enacted PL-96 -92, International Security Assistance Act of 1979.
The pertinent language reads:

The President is authorized to provide (without charge) quality
assurance, inspection, and contract audit defense services under
this section-- (1) In connection with the placement or administra-
tion of any contract or subcontract for defense articles or defense
services entered into after the date of enactment of this subsection
by, or under this act on behalf of, a foreign government which is a
member of the North Atlantic Treaty Organization, if such government
provides such services in accordance with an agreement on a recipro-
cal basis, without charge, to the United States government; or
(2).... (This part concerns similar services to be provided for the
NATO I nfrastructure Program, see Chapter 2.)

Chapter 12
B-75

9. Finance

a . Progress Payments and Multi-Year Funding

In December 1975 the F- 16 Program Office informed senior Air Force officials
that due to financing arrangements , its US prime and subcontractors had
reached an impasse in their efforts to place subcontracts in the 4 European
nations. The European industries involved, were demanding their customary
financing terms, i.e., either 100% progress payments on a bi-monthly basis and
within 10 to 20 days of billing, or advance payments. At that time the normal
rate allowed by ASPR was monthly reimbursements for 80% of their costs and a
30 day billing rate, with authority to go to 90%. Futhermore, US contractors
cannot pass on the cost of borrowing the rest to the USG.

For theTEuropean industries concerned, accustomed to being paid everything,
including profits, as they go along, these terms appeared to be outrageous.

As General Dynamics vice-president in charge of the F - 16 program, Blaine
Schei deman, put it,

"This was a monumental problem for some of them that didn't have any
cash to speak of in the bank."^

The USG agreed to process an EPG reguest for an increase in the normal
progress payment rate for European subcontractors to 90%, if substantiated by
their submittal of the relevant documentation. Subsequently the DOD Contract
Finance Committee approved the request for 90% progress payments to European
subcontractors twice a month within 10 days of billing on the F - 16 co-

Chapter 12
B-76

production program. The rationale for their approval was stated in a memoran-
dum dated June 14, 1976 and read as follows:

Our consideration of your request for deviation has been based on
the following factors: (1) the DoD commitment under the MOU, (2)
the funds to be expended under the EP Subcontractors are principally
EP Government funds provided under an FMS arrangement, (3) the fact
that the EP Governments originally intended that their funds be
expended with their subcontractors in accordance with customary
European financing arrangements , i.e., either advance payments or
100% progress payments, and (4) the substantiating data submitted by
the EP Governments indicate that progress payments, even at the 90%
rate, are less favorable than customary financing arrangements on
contracts awarded by their governments for services and articles of
comparable complexity, m

The Program Office proceeded to incorporate the provisions into the contracts

with GD and Pratt & Whitney.

In a later action the ASPR Committee authorized 90% progress paynents for all

new FMS_contracts for the F-16 whether coproduction was involved or not.

The Contractor, aware of this authorization, made 90% progress pay-
ments a subject of negotiation on ECP 0006 which would, among other
things, exercise an option for Consortium aircraft. This compli-
cated the issue for the F-16 Program Office since the EPGs were
already having a problem meeting the existing payment schedule.

Briefly, the SPO incorporated 90% progress payments for the airframe
prime and subcontractors into ECP 0006. The EPGs have stated they
will accept the obligation only if it does not impact their payment
schedul es .

At this time the impact of increased progress payments had not been
fully assessed and the issue remains open.

In future programs where co-production is a factor the initial pay-
ments schedule should reflect the 90% rate and we should be prepared
to make further adjustments for European subcontractors .412

In dealing with another European subcontractor concern,
that helped out the US contractors. The European firms

it was the 4 EPG ' s
were expecting firm

Chapter 12
B-77

commitments for hundreds of planes, but the USG only buys in annual
instal Iments .

This seemed to many of the European subcontractors a risky foundation on which
to make heavy investments in production equipment for the F-16. Eventually,
the EPG's dampened the risk by at least guaranteeing most of their full orders
for fighters.

b. Payment Schedules

In computing Funding Plan requirements, the SPO constructed an expenditure
profile for the EPG portion of the F-16 program (from which it then developed
the progress paynent profile). During the Multi-national Fighter Program
Steering Committee meeting held in Brussels, Belgium on December 8, and 9,
1976, the EPG representati ves expressed dissatisfaction with the several
points of their 4 LOA's.

Chief among these several concerns was the "front loaded" payment schedules.
Belgium, Denmark, and Norway had particular problems of funding shortfalls in
the early years of the program, while the Netherlands had problems over their
budget cycle to funds requirements . After consideration of several options
legally available, the USAF developed, in light of the partnership nature of
the program, a three-point financial arrangement to ease the EPG funding
probl ems .

Chapter 12
B-78

One, the normal FMS cash advances required to cover potential termination
costs were waived for all 4 EPG's. However in accordance with Section P of
the MOU, the EPG's are still responsible for termination costs.

Secondly, authorization was obtained allowing the EPG's the option of defer-
ring the paynent of R&D costs, established at $470,000 per aircraft. The
recoupment of these nonrecurring costs would normally be assessed upon
delivery of the aircraft.

Interest will be charged at the prevailing treasury rate on all R&D deferred
recoupments at the time deferment occurs. Acceptance of this option varies by
country as follows:

Belgium - payment of R&D recoupment delayed until 1984;

Denmark - payment of R&D recoupment delayed until mid- 1980;

The Netherlands - paynent of R&D recoupment will be paid upon aircraft
del ivery;

113

Norway - payment of R&D recoupment delayed until mid- 1981.

The third point included a U.S. Treasury agreement to accept advanced payment
from any of the EPG's, and invest and disburse these funds against F - 16
program requirements . The Netherlands was the only country to opt for this

Chapter 12
B-79

arrangement, making an advanced payment of $60 million from excess F- 16 funds
available in CY 77 and CY 78.

Notwithstanding the fact that these special arrangements were made
there is still a distinct possibility that, due to fiscal con-
straints, some of the EPGs may not be able to meet the payment
schedules in their LOA. Should this occur the Consortium F- 16
account may not have sufficient funds to cover the shortfall and the
Program Office would be faced with the unpleasant necessity of
ordering the contractors to stop work.

The possibility exists that this situation could be handled through
short term, interest bearing, loans by the contractor and the Air
Force is pursuing this option. The EPGs are receptive to the idea
as are both major contractors and the Air Force has drafted imple-
menting contractual terminology and begun negotiations. One con-
tractor, however, is insisting on a U.S. Government guarantee of the
loan as a non-negotiable condition which the Air Force, from a legal
standpoint, cannot accept.

This possible problem area remains open and is without final solution at the
present time.

In summary, the Air Force was able to provide some relief for EPG funding
problems through the process of obtaining waivers to existing directives. As
pointed out in the DSMC study, part of the solution to front loaded paynent
schedules lies within the waiver authority available to the DOD and the DOD
should consider blanket waivers to prepayment of termination liability and
deferring R&D recoupment whenever cooperative programs with foreign allies are
contempl ated.

c . Contractor Capital Investment Incentives

As the F - 1 6 program progressed officials in OSD and the Air Force recognized
that the program could benefit from special termination protection being pro-

Chapter 12
B-80

vided the contractor so as to increase the incentive for capital investment.
Referring to a previous Deputy Secretary of Defense Memorandum— "Capital
Investment Incentives for Contractors," Enclosure 2 to Attachment 1, W.P:
Clements, 21 May 1976— the Acting Principal Deputy Assistant Secretary of
Defense (L), Dale Babione, granted authority to use a special termination
buy-back technique.

In essence the technique authorized arrangements to be made, in the event the

program was partially or wholly terminated, whereby the contractor would sell

to the US 6 capital investment items for their amortized value.

The real value of the clause is hard to quantify but in view of the
uncertainties in a cooperative program with foreign countries this
special provision should provide incentive to the contractor to make
capital investments which benefit the services. The clause devel-
oped for the F- 16 should serve as a model for other programs. ^

d. A&normal Escalation Rates

In providing for abnormal escalation rates in the contracts, each EPG provided
the price indices that would apply to their own subcontractors for both upward
and downward adjustment. These will be reflected in the price adjustments to
the prime contracts and will be allocated to contractual effort in the time
frame involved, being recomputed every six months. The amount of the adjust-
ment is then prorated to each of the 4 EPG LOAs payment schedules in accord-
ance with the level line pricing agreement. With regards to economic price
adjustment, the DSMC study offered this.

Chapter 12
B-81

The lesson learned is that it takes the EFGs a great deal of time to
develop these indices and, therefore, they should be developed early
so as not to impede contract negotiations.

e . Foreign Exchange Arrangements

The five governments agreed in the MOU that currency exchange procedures be
formulated on the basis of the principle that companies participating in the
program were to be insulated from fluctuations in foreign exchange rates. To
insure that this provision of the MOU was met the Air Force Accounting and
Finance Center (AFAFC) of Denver, Colorado established the Currency Clearning
House (CCH) in Brussels, Belgium. The CCH established accounts in the four
EPC's to handle the continuous foreign exchange transactions of the program1 s
contractors. In supplement No. 1 to the MOU the following schedule of fixed
rates of exchange (in effect in October 1975) was agreed to for subcontractor
billing and payment by the primes:

Bel gi an F ranc
Dani sh Kroner
Netherlands Guilder
Norwegian Kroner

38.660 per SI .00 U.S.
6.015 per SI. 00 U.S.
1.663 per SI. 00 U.S.
5.520 per SI . 00 U.S.

Under the arrangement the five participating governments initially deposited
currency stock in the clearing house on the basis of their participation in
the program. As progress payments are drawn by the U.S. and European manufac
turers as needed, the currency stocks are replenished by the governments in

Chapter 12
B-82

117

the form of payments for their F-16's. The four EPG's make these deposits

to a U.S. Treasury account maintained by the AFAFC based on their quarterly

DD Form 645, Foreign Military Sales (FMS) Billings. Then, for example:

An EPG contractor bills the Prime for work accomplished under the
contract in local currency. The Prime authorizes payment from the
Prime's account in the Brussels-situated arm of the Air Force
Accounting and Finance Center, specifically established under con-
tract with a commercial bank for the F-16 program, the Currency
Clearing House. The Prime's payment is denominated in MOU-equiva-
lent dollars. The Currency Clearing House must then acquire the
required amount of foreign currency in the marketplace and pay the
prevailing rate for the exchange. The five particiating governments
share the burden or benefit of any variance between the MOL) rate and
that which exists in the international money market at this time. ^-8

When the dollar is depressed vis-a-vis the fixed rate, the Europeans benefit,
and vice versa. Over the life of the program, the net impact is anybody's
guess.

The DSMC study stated that, "The F-16 currency exchange provisions are felt to

119

be worthy of emulation by succeeding programs."

In setting up the CCH the AFAFC elected to place the deposits with a commer-
cial bank which could provide for administration of the arrangement and an
account where deposits could earn interest.

The international banking community was offered the opportunity to submit pro-
posals to operate these accounts. As a result, 17 major financial institu-
tions submitted proposals. After analysis of these proposals, the Chase
Manhattan Bank, was selected as the financial institution to operate the four

Chapter 12
B-83

accounts and an operating agreement was executed by the bank and the U.S. Air
Force .

Because of the requirement for a central bank to be located in Brussels, the
Banque de Commerce, S. A., which is affiliated with Chase Manhattan was chosen
as the "lead bank". A branch of the Chase Manhattan bank is the bank used in
Denmark, and another Chase affiliate, Nederlandse Credietbank, N. V., is the
bank used for the F - 16 program in the Netherlands. As "foreign banks" are not
authorized in Norway, a correspondent bank relationship was established with
the Bergen Bank for transactions in Norway. The CCH deals through the Banque
de Commerce in Brussels in transferring and exchanging currencies between the
various accounts. ^

The following flow charts help to better understand this process.

Chapter 12
B-84

10. Other Intergovernmental and Contractual Issues

a. Reliability improvement Warranty

While negotiations were underway with prospective avionics sub-system sup-
pliers during full scale development (FSD), the LJSAF and General Dynamics
required quotations from the competing suppliers offering an option for
Reliability Improvement Warranty (RIW). Under such an arrangement, the
original supplier agrees to repair and overhaul major line replaceable units
at a fixed price, and in some instances may be required to guarantee a field
reliability figure. In the case of this latter guarantee, if reliability

falls below the figure, the contractor must supply the extra spare parts

121

called for, at cost.

The USAF and GD elected to procure five major subsystems under the RIW
arrangement: the Westinghouse radar; the Singer Kearfott inertial navigation
system; the Lear Siegler flight control system computer; and the Marconi -
Elliott Head - up display (HUD) and display electronics.

Since the EPG had not yet committed to buy any F-16's at the time the Air
Force negotiated the F - 16 contract, the Reliability Improvement Warranty pro-
visions in the original contract call for options to be exercised on US air-
craft only.

Paragraph 63. g. of the contract states that: In the event future
production ACF aircraft are sold to the Consortium, the contractor
agrees to negotiate with the Consortium to extend warranty coverage
..." In late 1975 and early 1976 the RIW provisions became a topic
for discussion in several F - 16 meetings and, along with other

Chapter 12
B-85

issues, concerned managers raised questions about bringing the EPG
under RIW warranty coverage. Most of the issues dealt with our own
RIW problems so that in February 1976 senior Air Force officials
made a conscious decision not to extend RIW coverage to the EPG
until our own problems were settled and to bring the EPG into the
RIW Program when we exercised the Air Force RIW option. By Fall of
1976 the Air Force recognized that anything other than a joint RIW
program would not be workable or would result in a tremendous cost
to the EPGs.122

The resultant USG proposal was rejected by the EPG's. The problem was, that
the US RIW provisions had been negotiated in a competitive environment, while
introduction of the EPG's at this later point would mean their having to pay a
considerable premium for obtaining similar terms in a sole source situation.
The USG and the EPG's reached an impasse in late 1976 and were still there as
of mid-1978. The EPG's claimed the USG had not lived up to its management
responsibilities when it elected not to negotiate an EPG RIW option, at the
same time it negotiated its own, while the US countered that the EPG's were
not yet- i n the program at the time they were negotiated and furthermore had
unofficially mentioned that they were not interested in the RIW option.

The DSMC study provided the following recommendation for future programs

In the future it appears that, even though it may complicate our
program, if we contemplate RIW and foreign involvement in the pro-
gram is likely; RIW provisions covering the non-U. S. portion should
be negotiated at the outset particularly if there is competition at
the beginning of the program. At least two benefits accrue; a bet-
ter price may be obtained and the foreign country would be aware of
the cost of RIW before selecting or rejecting that provision . 123

b. Patent Infringement

Liability for patent infringement during production was yet another area where
the FMS-as-usual and partnership aspects of the project were initially a poor

Chapter 12
B-86

fit. Normal FMS procedures provide for assumption by the purchasing govern-
ment of any risk of Patent infringement. Since the EPG's viewed it as a
cooperative project and outside of normal FMS, another arrangement was
necessary.

A Steering Committee Arrangement provides for revised liability in
that EPGs agreed to assume liability for any patent infringement
occurring in the EP countries and USG committed to pay its prorata
share for foreign patent infringement based on the portion of items
produced in an EP subcontractor 1 s plant which are destined for USAF
use. The F- 16 arrangement appears equi
sidered as a model for future programs.

c. Buy American Act

Standard i nterpretati on of the Buy American Act at that time required that, in
the procurement of supplies and services, only domestic source end products
shall be acquired by U.S. Government agencies. However in those cases where
such procurements are necessary, the procuring agency must fully substantiate
the requirement on the basis of cost, availability, or related factors that
justify procurement of a non-U. S. item. These are handled on a case-by-case
basis. For those cases involving the DoD, authorization to waive provisions
of the act are granted at the local level for low value items, or at the
Service Headquarters or DoD level for larger procurements .

The fact that the Europeans were producing 10% of the procurement value of the
USAF acquisition of 650 F-16's, required an exemption. The exemption was
issued by Headquarters , USAF, Deputy Chief of Staff, Systems and Logistics,
with the approval of the Office of the Secretary of Defense, Defense Security
Assistance Agency (DSAA). This exemption was reaccomplished annually.

able and should be con-
24

Chapter 12
B-S7

EPG Restrictions on Certain Third Country Sales

Some of the EPG's objected to parts manufactured in their country being used
on F-16's purchased by certain third countries in high tension areas of the
world. Some national laws prohibit use of goods manufactured in their country
by another country engaged in war or likely to instigate one. Since all parts
produced in the EPG's were second source this problem was solved by pooling
all production parts from both sides of the Atlantic so that they would lose
their identity in production aircraft, and by the USG taking delivery of all
assets intended for other countries prior to any transfer.

e . Legal Staff

The following quote on the importance of a legal staff for such programs as

the F - 1 6— i s taken from the 1979 Burchfield review of the F- 1 6 project.

The legal staff for programs such as the F- 16 program are invaluable
and essential to completion of agreements prior to and after MOUs
are in progress. The legal staffs on the program have not only
developed solutions to problems encountered, but can assure compli-
ance to specific requirements of MOUs and contracts. For example,
in such a program legal counsel is needed in determining necessary
deviations, waivers, and effect or impact of liabilities for actions
by U.S. personnel in regard to MOU requi rements . Additionally, the
legal precedence (history) established on such programs can be
invaluable for future programs.

Recommendati on :

1. Legal counsel be obtained for assignment to programs such as
the F-16 at the earliest practical date.

2. That the legal lessons learned on the F-16 program be furnished
to future programs such as the NATO Early Warning and Control
Program ( AEW&C ) and other co-development -- co-production
programs . 125

Chapter 12
B“88

11, Logistics Support

The MQU signed by the five participating governments requires that the U.S.
provide:

1. utilization of depot level maintenance and overhaul facilities by the
U.S. Air Force Europe (USAFE); established and funded by the four EPG's
as well as industry maintenance facilities available in these countries;

2. full logistics and technical support to the four European Air Forces as
long as the F-16's are in operational use;

126

3. aircrew and maintenance training for the Europeans.

Subsequent agreements were also negotiated which provide for: the sharing of
spares; interim contractor support; and rel iabi 1 i Ity. Ogden Air Logistics
Center,— Hi 1 1 AFB, Utah, was designated as the F-16 logistics management cen-
ter, but direction was scheduled to remain under the director of F-16 logis-
tics at the SPO, Wright-Patterson AFB, Ohio;, through 1981. The Odgen center
will be the prime control for F-16 logistics, with responsibilities for sub-
system delegated to other air logistics centers, depending upon their special-

127

ized capabilities and workloads.

The five PG's agreed upon a common data management system, wherein the four
European air forces will be linked to an F-16 system manager at the USAF's
Ogden data center.

Meanwhile the F-16 SPO' s logistics office includes a European division,
staffed by three resident logistics officers, one each from Belgium, Norway,

Chapter 12
B-89

and Denmark. The logistics assignment for the Netherlands is handled by that

128

country1 s senior representative on Program Manager's staff.

The five air forces operated as a common procurement body in identifying

requirements and requisitioning their initial spares provisioning for their

F-16's. The five were also planning for a single central European depot for

high cost, low usage items (i.e., insurance items). Although there was never

any real timetable for this, it was originally expected that the Europeans

would have advanced farther than they had, as of mid-1980, with regard to

developing a European depot structure. This was still several years down the
129

road. More will be said on this shortly.

Other studies were carried out on common maintenance facilities and common

130

operational software. One interesting feature of F-16 logistics is the
spares "acquisition program applying to all five countries orders. This
involves the procurement by GD of spares covering 125 high-value items at same
price as for production orders if the two are placed simultaneously, thereby
reducing the price to the air forces. General Dynamics computes the recom-
mended spares levels on these items for all five countries, sends this to the

logistics office for evaluation and USAF responds with a determination of the

requirement for each country. General Dynamics then processes the orders.

This procedure has applied since the first spares buy in January, 1977.

Since the second production buy in July, 1977, the EPI's have had the oppor-
tunity to bid on initial spares. The opportunity has also been opened up for

the EPI's to bid on a price competitive basis for F-16 material common to

other USAF aircraft. The implementation of these arrangements though has been

Chapter 12
B-90

USAF/General Dynamics F-16A of the 34th Tactical Fighter Squadron is photographed
from a Boeing KG- 135 tanker during Red Max Alpha exercises. Three aerial refuelings
were made by the 12 F-16As during 10-hr„ 4,350-mi. nonstop flights.

complicated by several factors. For one, the European air forces were
reportedly slow in ordering spares, as well as support equipment. The
Europeans were also reluctant to cooperate in supplying the logistics planning
data necessary for doing a proper job of planning for support of the aircraft.
Another problem was introduced by the MOU's only referring to initial spares,
while there was no agreement on what constitutes initial spares and replenish-
ment spares. These problems tended to complicate the task of personnel con-

131

cerned with logistics in developing a plan for co-production.

Other factors impacting on logistics planning were greater European reliance

for periodic maintenance on contractor support (e.g., bases being closer to

factories). In addition, there is considerable variation among four European

air forces in the level of contractor support desired. As an example Denmark

was initially the country most interested in contractor support, having lower

projected flying hours for the fighter than the other Europeans, it was will-

132

ing to accept a slower building up of its own capabilities.

The USAF was reportedly originally concerned that its own resources would come

under pressure from commitments to the four EPG' s, primarily by draining

spares from its inventory if delivery commitments for aircraft and spares

133

orders are not properly in line.

Actually, as of mid- 1980, there had been very little direct tapping of Euro-
pean sources for initial and follow-on spares. It is expected that, as it
becomes more feasible to bypass General Dynamics, the SPO (and as of the fall
of 1980, the Air Logistics Center (ALC) at Hill AFB in Utah, with beginning of
Primary Management Responsibi 1 ity Transfer ( PMRT) ) , will continue to rely

Chapter 12
B-91

heavily on U.S. vendors, taping the European firms directly in only a few
cases. The ALC has gradually been acquiring reprocurement data from the U.S.
contractors; first from GD, with that of the U.S. vendors being procured over
a longer period of time. By 1981 the program was in the breakout mode on
stabilized items.

Most European firms involved in the program are reportedly not all that inter-
ested in the investment required to qualify as vendors themselves. Given that
there are no guarantees of a long-term business base and that the EPI are not
commpetitive with their U.S. counterparts (economies of scale alone accounting
for the greater part of this), they have shown considerable reluctance as far
as the required capitalization is concerned. Instead they show a marked pref-
erence for staying tied to the apron strings of the U.S. vendor to whom they
are subcontractors . Evolution away from this pattern is expected to be slow.
Most Europeans will stay attached to, and dependent upon, the U.S. partner,
because the advance in capability required to quality as vendors or for repair
work is too great (e.g. , level of testing).^4

For follow-on spares, AFLC faces no off-set obligations (the MOU off-set
requirements applied only to production and initial spares). The EPGs were
not interested in paying the concomitant premium for spares. Contracts are
awarded by the ALC on a purely competitive basis.

The EPGs originally spoke of going direct to their own firms for certain
spares and thereby circunventi ng the costly USG-US industry loop back to their
own industries. (See the later subsection on issue of loadings and GD ' s
reasoning for not going direct to the EPI for spares.) GD's response to this

Chapter 12
B-92

stance was that the EPGs were welcome to go ahead with this acquisition
approach, but then with all parts being GFAE, they would have to assume the
concomitant responsibilities. Faced with this prospect, the EPGs backed off.

The first major award directly to one of the EPI was in July, 1982, with the
award by the San Antonio Air Logistics Center to Belgium's Fabrique Nationale
of a $26,899,610 firm fixed price contract for elements of the F100 engine for
Israeli F-15's and Dutch F-16s: 185 first stage disks, 720 forgings for the

first stage disk, 130 second stage disks and 1010 forgings for the second
stage disk. Two firms had been solicited and two proposals submitted.

The logistics Overview of the Multinational Fighter Program (Enclosure (7) of
the DSMC F - 16 Lessons Learned Study) identified two factors which signifi-
cantly complicated the F-16 logistic support program:

- Accelerated F-16 aircraft development and delivery schedule resulted
in concurrency (which occurred primarily in the avionics area);
Unique multinational program arrangements .

The effects of this concurrency on the program include:

the necessity to plan for at least two years of contractor support
at the intermediate level, which impacts the F-16 1 s capability in
wartime situations;

the unfavorable impact on both the delivery schedule and quality of
the logistic elements by the late imposition of configuration con-
trol to the component level, and;

test data useful for logistic planning (i.e., estimating spares
requirements ) would not be available.

Chapter 12
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Quoting from the DSMC study:

While the situations described above will exist to some extent in
every program, concurrency seems to aggrevate them. Our review of
the F -16 indicates some useful approaches to minimizing concurrency
impacts. For the avionics, contractor support is being used exten-
sively for CFE and in some areas for GFE. An extensive logistic
event milestone network is just now being implemented by F- 16 SPO.
This network should provide visibility of the "chokepoi nts ." In
addition the F- 16 has attempted to establish a logistics data file.
In a program with a compressed schedule a single data base is a good
management control technique.

On the negative side, the approaches just described were implemented
late in the program. Also the AIS, a major system from a logistics
standpoint was ordered late in the program. The reasons for this
appears to be the lack of manpower in the SPO logistic areas.

At the time of the FSD contract only one individual was assigned in
the SPO to the logistics area. It was over a year after the FSD
contract award before additional personnel were added in the logis-
tics area. 135

The other major impact on the logistic support for the F - 16 can be attributed
to the program's multinational character. As a result of this partnership
logistic support had to be provided almost simultaneously for seven different
base activations: 2 USAF TAG installations; one in each of the EP C ' s ; and one
in Iran (replaced by Israel). This is a scenario unlikely to occur under
standard FMS agreements. In contrast, during the same initial 18 month period
for the USAF F-15, only one base with 67 aircraft (about 1/3 the number of
F- 16 1 s ) was activated in one country (the U.S.).

But since the number of aircraft was known, and the EPG countries
identified, there is little doubt that site activation requirements
should have also been known. However, a review of the DSARC II doc-
umentation which was the first full scale OSD review of the program
indicates that logistics was not mentioned as an issue. There were
no experienced logistic personnel involved in the program at that
time. This would probably account for the lack of notice in the
logistic areas .136

Chapter 12
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This activation of a large number of bases over a short period places unusual
demands on both production capacity and available manpower. Orders for the
initially large numbers of spares required to outfit each base were placed at
a time when the production rate was just building up. The SPO was concerned
that production capacity, faced with the rapid build-up in site support, would
not be adequate to meet both the end product and spare requiremments . As of
spring 1978, evidence had appeared suggesting that there were going to be
problems .

In the engine area (a subsystem already in production), it was known that
engine spares as backup for factory installation would not be available. The
DSMC study noted that.

One solution to this problem would be for the EPG to agree to share
spares. However, national considerations will probably prevent this
solution from being implemented.^

Manpower was also expected to be a problem in base activations. It was feared
that pilots and maintenance manpower would be trained, at a time when there
were relatively few assets and everyone was still learning about the system.
With many bases involved any problem areas would be magnified.

To compensate for the spares and manpower shortages:

The F-16 program has instituted a policy of early training and an
analytical approach related to aircraft availability to estimate
spares requi rements . It's too early to tell how effective these
approaches will be. However, they cannot overcome the basic prob-
lems of production capacity and lack of material resources for
training. Given the politics involved in "selling" co-production
arrangement, it is probably impossible to improve the situation for

Chapter 12
B-95

new programs. The only, caution that is suggested is that in selling
programs, promises about early support capabilities be minimized.138

In July 1980, It. Col. Kehl (USAF) of the F -16 SPO was able to report, how-
ever, that the severity of spares and manpower problems caused by rapid simul-
taneous build-up in site support requirements in the six nations have been
much less than feared. As such there has been no serious impact on the USAF
to date in these areas.

In June, 1978 DSMC study offered the following two logistics lessons provided
from the program:

Logistics consideration will not change the political realities
involved in selling a "co-production" program. The approach there
is to "minimize the losses." This would involve intensive logistic
planning and implementation efforts as early as possible during FSD.
In ‘urn, this requires allocation of experienced logisticians and
funding (apparently not an F- 16 problem) to support the program .

In selling co-production programs, care must be taken about the
promises made 'to other countries in terms of system support. Our
experience is that we must mature our support along with the
aircraft. Thus, early experience with aircraft is that they have
low readiness rates, partially due to hardware and partially due to
software. Countries expecting other than this will be "unhappy".
Thus, in selling programs the readiness expectation of the country
getting the system must not be raised too high.13^

In August, 1980 a GAO report, "F-16 Integrated Logistics Support: Still Time
to Consider Economical Alternatives" (LCS-80-89) was released. Among other
things it covered the status of negotiations between the USAF and the four
F-16 EPG's over arrangements for European depot level support of the fighter.
Per the MOU they were to provide depot support for U.S. F-16 1 s in Europe.

This work had been estimated at up to $147 million in offset potential from

Chapter 12
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1981 through 1986 and may be needed if industrial participation terms of the
MOU are to be met, GAO said, but "little if any support" will be available
when the F - 16 is activated in Europe next year unless the Air Force acceler-
ates its negotiations with the EPG's. 140

So far, the U.S. and the EPG's "are waiting on each other to make the neces-
sary decisions and commitments", GAO reported. "For example, Air Force offi-
cials say they cannot count on EPG's doing depot repair until the EPG's estab-
lish and fund the maintenance repair facilities. Yet, the EPG's insist they
cannot establish or fund the facilities until they have a U.S. repair commit-
ment to justify their investments ."141

GAO reported that the EPGs' "senior national representatives" from Denmark,
the Netherlands and Norway said "they have no basis to begin planning," due to
the following concerns most EPG repair facilities are fully engaged in produ-
cing F-16's and won't be able to accept much repair work until production
contracts end; that the U.S. limits repair contracts to one year while the
Europeans don't; that the Air Force decision permitting repairs by EPG's was
made too late for facilities to be ready for 1981, and; that the Air Force was
not given the EPG's list of F- 16 reparables that would be available for depot
repair .

But the fourth EPG, Belgium, said in comments on the GAO's draft report that
it would be able to do depot repair work, even during production, according to
GAO. 142

Chapter 12
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With plans for EPG depot repair lagging, the Air Force "mav be overbuying equip-
ment for U.S. repair capabilities", GAO speculated, noting that depot-level
avionics test eouipment is bought without considering work that may be done by
the EPG's. "As a result, the Air Force may have overstated its automatic test
equipment requirements by $7 million "143

As a sequel to this issue, three years after the release of the GAO report,
the French aerospace weekly Air et Cosmos announced in August 1983 that the
Belgian firm SABCA had been selected by the USAF as its F-16 depot level main-
tenance and overhaul contractor in Europe. Fokker had been the competing con-
tractor for this award.

Chapter 12
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12. GD: SETTING UP FOR TRANSNATIONAL

SUBCONTRACT MANAGEMENT

The F-16 Production program is a joint business effort to produce the U.S.
desiqned and developed F-16 on both sides of the Atlantic. General Dynamics
is F-16 prime contractor with total system responsibility except for the engine,
for which Pratt & Whitney is the prime. Both are under contract to the USG
which in turn sells the aircraft to the Europeans through FMS channels. Under
these two U.S. contractors come all the second and third tier U.S. and European
contractors. All production in Europe is second source under contract to the
U.S. primes or their subcontractors. There are three aircraft assembly lines,
one at GD's Dallas/Fort Worth, Texas facility for the USAF and third country
aircraft and two in Europe; one at Fokker in the Netherlands for the Dutch and
Norweaian aircraft (originally totaling 178 aircraft), and one at SABCA in
BelgiumTor the Belgian and Danish aircraft (originally 178 aircraft as well).
For the engine there are two assembly lines, one at the Pratt & Whitney facility
in Florida, and one at Fabriaue Nationale in Belgium. Note that in all three
cases of European assembly, these firms are acting as subcontractors only, not
licensees, the U.S. primes retaining full responsibi 1 ity.

The ultimate goal of the program is to olace enough F-16 production work in
Europe to eventually offset 100% of the four European nations' aircraft buy.

The 4 LOA's for the 348 aircraft signed in May, 1977, had a collective value
of $2. 6 billion.

Aircraft and engines manufactured in Europe will be made to U.S. engineering
specifications. The drawings and specs provided to the European Participating

Chapter 12
B-99

Industries (EPI) are in Anglo-Saxon units, and are converted to metric (at
their option) and translated to the national languages by the EPI. The draw-
ings are then used to generate the "factory paper" of the EPI, i.e., shop
instructions, blueprints, process sheets, etc. Inspection and acceptance are
to the original U.S. drawings and specifications in the original non-metric
measurements and in the English language.

Thirty odd firms are involved from the four EP countries. Three aircraft
firms manufacture airframe components, and assemble the aircraft for delivery
to the air forces of the 4 EPG's. Four firms are participating in fabrication
and assembly of the engine, and another 27 plus EPI firms are involved with
avionics items and equipment subsystems.

Following the signature of the MQU and the preliminary contracts by the four
EPG's; 13D held a seminar in late July, 1975, in Fort Worth to explain to its
U.S. subcontractors the ground rules for European coproduction. The subcon-
tractors were instructed to offer standard DoD purchase order contracts and
standard request for proposal forms.

In late October, GO organized a trip to the four EP countries for 40-odd
existing and competing U.S. subcontractors. The group's first stop was in
Copenhagen. After the U.S. teams presentation at a meeting sponsored by the
Federated Danish Industries, the participants broke up into splinter groups
representing specialty areas. With 50 Danish firms represented, only 12
stayed around for detailed briefings, and only two of these employed more than
500 people.

Chapter 12
B-100

The next stop was Oslo, where the U.S. industrial team was informed that the
Norwegian government would select those Norwegian firms that could participate
in coproduction. According to Norman Day, GD's F- 16 Director of Material,
"Later this gave us problems because the Norwegian government didn't want too
many companies dependent on defense contracts. 144

The team then moved on to The Hague and Brussels where they found experienced
aerospace companies.

GD left its U.S. subcontractors in Europe and instructed them to issue RFP's
on the spot, and to come back to GD with firm proposals by the spring of 1976.
But this was not to be. By July, 1976, there had only been two major copro-
duction awards. Both were by GD itself; one being to Fokker in the Nether-
lands, and the other to Fairey (soon to become SONACA) in Belgium.

The first problem, according to Day, was that the prospective EPI "couldn't
understand U.S. armed services procurement regulations. We extracted complete
sections and translated them into (simple) English. 145

Once this was accomplished another problem cropped up.

The Europeans soon found that they had a lot to learn about the
arcane ways of American military procurement. General Dynamics had
to put into its overseas contracts the Pentagon's standard boiler-
plate clauses, including the right to terminate all work, that are
ordinarily in American defense contracts. The Europeans went crazy.
They absolutely refused to sign. Many of the contract terms went
against the grain of European business practices, while some clauses
imposed 'unwelcome' U.S. government supervision. Most of all, the
very notion of having to conform to alien ways riled European
executives .146

Chapter 12
B —101

The 'unwelcome* supervision included the aforementioned USG accounting and
auditing requirements. Quoting from the March 1977 issue of Fortune magazine

All together. General Dynamics ran into varying degrees of resist-
ance to several dozen conditions. Scheideman, who still flushes
when recalling the struggle, insists: "We never doubted that they
could make the parts. The real question was, could they do business
like a normal U.S. aerospace organization?" To resolve the impasse.
General Dynamics called for Washington's help. "It was clear", says
Scheideman, "that the U.S. government couldn't just make this famous
offer and then walk out of town."

The company enlisted the help of Fred Wood, the Air Force's business
director for the F-16. A senior civil servant with exceptional
flexibility. Wood recognizes that the- Europeans are motivated by one
basic principle: "There must be something in it for them." None-
theless, it took Wood and General Dynamics officials nine months of
haggling with five governments and dozens of companies to settle
everything.

Some of the most distasteful contract terms have been made palatable
by compromises that, in retrospect, seem amazingly simple. But the
U.S. government had to surrender some of its usual prerogatives . 147

Other business differences encountered included financial practices. Even
though the U.S. contractors were offering straight, fixed-price contracts,
U.S. and European financial practices were not compatible. As examples of
this Blaine Scheideman, GD vice president and director of the F-16 interna-
tional program, pointed out that, in Europe, depreciation is at replacement
value, not book value as in the U.S. As another example, imputed interest is
allowable as an expense in Europe, whereas it wasn't at that time in the U.S.
Also, the 100% scheduled payment issue arose frequently. Other problems that
cropped up will be covered shortly.

In addition to a need for a greater display of flexibility on the part of the
U.S. government agencies, much of the problem was due to a wide variance

Chapter 12
B-102

between the U.S. and European firms in the amount of their experience in
dealing with international collaboration in defense programs. Many of the
European firms have been involved in such programs for years (e.g. , having a
complete file of U.S. Mil-specs and Standards, and having worked with most of
them), while U.S. firms have been involved to a significantly lesser degree.
This is especially true of the winning U.S. prime contractor team. Whereas
the losing Northrop and General Electric team represented two of the most
experienced U.S. firms in this area, the opposite could be said of GD and
Pratt & Whitney. In the words of General Abrahamson, F- 16 Program Manager:

Initial contracts with European industry suffered owing to this lack
of experience and the "not invented here" approach taken in dealing
with European industry leaders. United States Government agencies
suffered from this same lack of international experience the lack of
sensitivity to European concerns and issues, and a tendency to deal
with the European Air Forces/Governments on the basis that the U.S.
way was the only way. Change is this attitude, which is not yet
complete, has been a difficult process.

Thus we see that, though the technology flow was in one direction, there was
room simultaneously for a great deal of collaborative, and some technical
know-how to be transferred in the opposite direction. Two of the more promi-
nent cases involved Fabrique Nationale (FN) and Fokker, both of which had been
heavily involved in numerous earlier collaborative programs treated elsewhere
in this paper. Citing the May 2, 1977 issue of Aviation Week & Space
Technology:

Jean de Fonvent, director of FN's engine division said: "We think
we have been able to be of some help to Pratt & Whitney with the
communications lessons we learned at FN in previous international
programs." Fokker concurs with the FN position. Van Bijleveld
said: "On the managerial side the management of multinational
projects is nothing new to us. General Dynamics had a lot to learn

Chapter 12
B-103

here. In this respect, it has been a two-way street." He credited
General Dynamics, however, for having made "tremendous strides in
working with Europe."

Fokker officials said they had been told by General Dynamics that
the Fokker final assembly concept had heavily influenced General
Dynamics' own final assembly procedures. Additionally, according to
the Dutch company, Fokker technicians were able to exchange experi-
ences with General Dynamics in honeycomb construction. Both are
using different techniques to get the same results in flaperons and
wing leading edge flaps

Fokker had to open GD's eyes as well, to other realities of international
industrial coll oboration . As one of the world's oldest aircraft manufac-
turers, and the only one in the Netherlands, the bulk of the Dutch work inevi-
tably fel 1 to Fokker .

But to General Dynamics' dismay, Fokker is spreading its portion of
F-16 parts and assembly among six widely scattered plants. This
arrangement threatens to be considerabl y more cumbersome than the
easy assembly of the fighter in the mile-long Fort Worth plant. The
F-16 is bulit in sausage-like sections, each of which is stuffed
with wires and electronic boxes; then the sections are simply bolted
together and connected. In the Netherlands the sausages are going
to travel a lot. But that happens to be the way that Fokker is
organized, and the Dutch government also wants to spread the jobs
around. These larger realities are so obvious to Fokker that its
manager of manufacturing engineering, Theo Van Bijleveld, remarks:
"General Dynamics was an absolute newcomer here, and they are still
learning. "150

Another area where GD was rudely surprised concerned the European industrial
relations environment and its impact on cost and production schedules. This
will be treated shortly.

Chapter 12
B-104

In any event, quoting the Fortune article by Krarr,

In fairness to the American company, it should be pointed out that
the European manufacturers were not terribly willing to educate
General Dynamics or to negotiate details, until their governments
had actually selected the F-16. Lewis's men had to estimate the
costs of making the plane abroad before they fully grasped how Euro-
pean manuf acturers operate. "And that may have been a mistake", he
concedes. Only when the European companies started bidding on their
shares of the F-16 did General Dynamics finally realize that the
lead times would be longer and the costs higher than expected. 151

On the U.S. government side two projects were cited several years later by
Col. Ron Carlberg as having been studied for useful precedents during the
early phases of project. The first one was the recently completed German F-4
coproduction program wherein German industry received offsetting subcontracts
from U.S. contractors for the Luftwaffe's initial order of 88 F-4's (see Chap-
ter 11). The second, the on-going NATO Seasparrow project was studied later,
but only, after they had gotten over to Europe and had found that the NATO
Naval SAM system project was constantly being cited by the four EPG's and
EPI's (see Chapter 10).

Chapter 12
B-105

13, GD's International Program Management Effort

a. Program Management

Within General Dynamics F-16 program at Ft. Worth, Texas, as of 1977, there
was a consortium program office with a staff of four country managers; one for
each of the four EPC's. Following daily 8 a.m. meetings covering F-16 program
status, the director of the consortium program holds a daily 11 a.m. meeting
of his staff and the dedicated line organization consortium program personnel
to review status charts in detail and cover all open items. The status charts
are updated by data from similar charts in the Brussels office, which in turn
are updated by data from charts at each of the in-country resident offices. 152

GD's Ft. Worth consortium program office has a counterpart European program
office 4n Brussels. The Brussels office includes two directors, one for pro-
duction and the other for customer support. The production director oversees
a staff of specialists representing plans and control, engineering, material,
production, and quality assurance, each maintaining contact with line organi-
zation counterparts in Ft. Worth. Under the director customer support comes
four country managers.

The Brussels office also maintains resident offices at a major supplier's
plant in each of the four EPC's (e.g., SONOCA/SABCA in Belgium and Fokker in

the Netherlands) . 153

Chapter 12
B-106

>;j .

Communications flow from the resident offices to Brussels, covering program
status in each of the countries or seeking solutions to problems. If the
probl ems cannot be solved by the Brussels organization, the specialist in
engineering for example, will contact his line organization counterpart in Ft.
Worth. 154

Copies of these communications come to the office of GD's consortium program
director in Ft. Worth, so the status of all requests, responses and action can
be tracked. This office can also alert other interested groups in the plant
to a problem. The response time goal is 24 hours. The greater part of
requests are handled in that time. If it can't be done in that time, the
representative at the European resident office gets a stated response time,

) thus providing a check-and-balance. The consortium program director's office

maintains a status of open items and can apply attention to the line organiza-
tion to get the problems cleaned up. ^55

The communications system between Ft. Worth and Brussels includes telephone,
Telex, teletypewriter , facsimile transmission and a weekly mail pouch. The
pouch leaves Ft. Worth every Friday morning annd arrives in Brussels the fol-
lowing Monday. Brussels sends Ft. Worth a pouch every Tuesday, arriving here
on Thursday morning. 156

Chapter 12
B - 107

b. Transnational Subcontract Management

The three principal subcontractors of GD in the EPC's were the Dutch firm
Fokker and two Belgian firms Societe Anonyme Beige de Constructions Aero-
nautique (SABCA) and Societe Nationale de Constructions Aeronautique (SONACA)

Fokker is one of the world's oldest airframe manufacturers. Since WWII in
addition to civil aircraft of its own design (principal among these being the
F-27 and F-28 transports), Fokker has participated in the production under
license during the 50 ' s of the British Meteor and the Hawker Hunter fighters,
the Lockheed F-104G in the early 60 1 s and the Northrop F-5 in the early 70' s.

SABCA had handled the production of the wings and the assembly of the F-104G '
in the early 60' s and produced wings for the Dassault Mirage 5 during the
70's. As such it was natural that GD gave SABCA wing production and final
assembly for the F-16. SONACA, which had produced the aft fuselage for both
the F-104G and the Mirage 5, received this same part of the F-16.

Most other EPI contracts did not involve GD directly. GD's US suppliers were
held responsible for selecting and managing their own subcontractors in the
EPC's, as will be covered shortly.

Each of the European assembly lines has been producing three aircraft per
month in comparison to the US line where GD was building up to a 15 aircraft
per month rate. SABCA and SONACA are collocated at Gosselies in southern
Belgium on opposite sides of the same airfield and will assemble 174 aircraft

Chapter 12
B-108

European Manufacturer

Belgium

Denmark The Netherlands

Structure

Center Fuselage

Fokker-VFW

Ait Fuselage

Sonaca

Wing Box

Sabca

Leading Edge Flap

Fokker-VFW

Flaperons

Jorgen-Hoyer Fokker-VFW'

Vertical Fin

Per Udsen

Pylons

Per Udsen

370 Gallon Tank

Landing Gear

DAF

Assy Fin Box

Sonaca

A/C Assembly + Fly out

Sonaca + Sabca

Fokker-VFW

Main Wheels

Engine

Fan. Core, 4- Assy

Gear Box Module

Disa

Augmentor Module

Philips

Fan Drive Module

Engine Assy

Equipment

Servo Acuators

Sabca

Emergency Power Unit

Disa

Engine Starting System

Disa

Heat Exchanges

Quintzau

Inverter

Silcon

Manual Trim Panel

Standard

Electric A/S

Pneumatic Sensor

Burmeister &, Wain

Door Actuator

Disa

Fuel Qutv Measure

Simmonds

Accelerometers

Ammunition Handling System

Anti Skid Brakes

Radar Racks

Wheel

Avionics

Radar Computer

MBLE

Chaff + Flare Dispenser

Disa

Channel Frequency Indicator

Radartronic

Electric Component Assembly

Standard Electric

Flight Control Computer

Burmeister & Wain

Flight Control Panel

Standard Electric

Fire Control Computer

DIG-1/

Rovsing & Neselco

Burmeister & Wain DIG I

Radar Control Panel

Burmeister & Wain

Radar E;0

NEA-Lindbere

Head Up Display

Oldelft

Radar Antenna

HSA

IFF Transponder

Central Air Data Computer

Inertial Navigation Set

Interference Blanker

Rate Gyros

Stores Management Set

US Manufacturer

Norway

General Dynamics
General Dynamics
General Dynamics
AiResearch
General Dynamics
General Dynamics
General Dyjnmies

Nordisk

Menasco Manufuctunn
General Dynamics
General Dynamics

Raufoss

Kongsberg

Kongsberg
Raufoss. Norcem

Kongsbera

NERA

Raufoss

Kongsberg

STK

STK‘

Kongsberg
G.A. Ring
Kongsberg
Kongsberg

Pratt &. Whitney
Pratt & Whunev
Pratt & Whitnes
Pratt & Whitney
Pratt & Whitney

Nat. Water Lift
AiResearch
Sundstrand
Hamilton Standard
Aerospace As ionics

Gen. Dynamics

Rosemount

Arkwin

Simmonds

Systton

Donner

General Electric
Sperry Vickers
Goodyear
Westinghouse
Goodyear

Westinghouse
Tracer
Magnavox
Get'.eral Dynamics
Lear-Siegler
General Dy namus
Delco Electronics

Westinghouse

Kaiser

Marconi*

Westinghouse

Teledyne

Sperry

Kearfoit Singer
Nos arron.ics
Northrop

General Dynamics

* Marconi Elliot is the only UK manufacturer in the F-16 program.

Source: NATO's Fifteen Nations

for Belgian and Danish air forces. Fokker will assemble the aircraft for the
original combined Dutch and Norwegian requirement of 174 aircraft.

Under an agreement with the three European subcontractors GD/Fort Worth is
handling "umbrella11 procurements of material. The combined purchases for
itself and its subcontractors allow the firms to take advantage of better
prices for large volume procurements of such raw material as sheet and plate
aluminum stock.

Though initial shipments for long-lead procurement were made to Ft. Worth and
then trans-shipped to Europe, these "umbrella" purchases have since been made
by the European firms themselves. The European subcontractors coordinate with
GD for these purchases, with the raw material destined for them being shipped
directly to their factories.

GD provided early airframe production support to its European subcontractors

including:

1. One disassembled F- 16 each to Fokker and SABCA/SONACA.

2. Six aft and center fuselages and six vertical fins to SONACA, and three
of each to Fokker.

3. 30 ship sets of details and assemblies, including center fuselages, main
landing gear doors, main landing gear build-up, wing leading edge flaps,

Chapter 12
B-109

wing trailing edge panels and f laperons, three ship sets of center fuse-
lage components and other assembly details to Fokker.

4. 15 ship sets of aft fuselages and other assembly details to SONACA.

5. Two ship sets of wing box structure and other details to SABCA.

6. Six ship sets of vertical fin details to Per Udsen.

7. Five ship sets of vertical fin details to SONACA. 157

Some of the material is to be "paid back" by the European airframe coproducers
late in the coproduction program. The repayment is to include 11 ship sets of
center fuselage, aft fuselage and vertical fins and two ship sets of main
landing-gear doors, leading edge flaps, flaperons, wing trailing edges and
wing box structure. ^8

There are more than 3,000 suppliers and subcontractors involved in the program
on both sides of the Atlantic, and synchronizing their efforts becomes criti-
cal to the outcome of the program. "The whole problem as we see it is manage-
ment of materials," Day said. For the basic 998-aircraft program, he pointed
out that 3 million individual items and 20 million lb. of raw material would
cross the Atlantic. ^9

Early-on in the program, GD found itself being snowed by the Europeans with
requests for special drawing data, such as brownlines and aperture cards. The

Chapter 12
B- 110

program got bogged down with the distribution and control of so much data.
General Dynamics finally went back to giving the Europeans the same drawing
data that they gave to their own manufacturing. This reportedly solved the
problem.

Another point worthy of note stems from the fact that Eruopean countries build
to drawings, not to planning papers. In fact this provided the best drawing
audit General Dynamics ever had. General Dynamics received 1488 requests for
changes in the first six months. 448 required ECN's out of which 350 were
drawing corrections. Liaison changes are authorized by Tech. Reps, "on site",
but all changes come back to General Dynamics for accountability.

After experiencing problems with documentation, packaging and packing of high
value defective items. General Dynamics proceeded to correct the situation.
There are some cases of confusion surfacing over items that had been returned
by the EPI's which were simply "tossed into a box" without proper packaging,
packing, or documentation to identify the problem, defect, or method of test-
ing. This caused damage to the items, confusion as to the reason for return,
and items not being reordered to fill the void of the returned items. Burch-
field's recommendations on this point were:

Future programs should require some type of documentation system for
defective or damaged items, orientation of instructions on proper
packagi ng/packi ng and shipping, and indoctrination on reordering
methods to prevent shortages which may result in delays in produc-
tion. This problem will requi re training and in depth (detail)
instructions from the prime contractor which General Dynamics has
done as a result of their experience. -^0

Chapter 12
B -11 1

GD has been successful in fulfilling a program goal of the transfer of signif-
icant technology to its European subcontractors. This has included for Fokker
and SABCA experience in systems integration and final assembly in such areas
as flight controls that both firms expect to be able to use on future civil
aircraft programs.

The technology transferred to the three firms involved in final assembly and
flight testing is described as "substantial", which is stated to mean over 50
percent increase in the company's ability to produce the products. Technolo-
gies not transferred include composite fabrication and aluminum powder

metal lurgy. 161

Sonaca, which manufactures the aft fuselage and parts of the vertical fin plus
carriesliut the fuselage mating operation, provides a number of specific exampl
of technology transfer. As a result of the F-16 program, according to the
USAF, the company has acquired several new technologies or facilities including

Three new 5-axis numerically controlled machines;

New post stretch draw and chemical milling capability;

An updated heat treatment facility;

A -'ontrolled paint facility;

Integral fuel tank sealing techniques;

Fixtures, tooling and test equipment;

Quality assurance;

Chapter 12
B-112

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Manufacturing planning and control; and
the know-how for modular assembly. 162

SABCA, on the other side of the Gossel ies runway, is responsible for the wing
box, final assembly and flight testing operations. Fokker in the Netherlands
is responsible for the central fuselage, f laperons, leading edge flaps, fuse-
lage mate, final assembly and flight operations. Both companies are said to
have benef itted from several of the operations listed above at Sonaca. For

example the F-16 program involved Fokker's first time using five-axis

163

numerically-controlled machine tools in high volume operations.

The transfer of technology was generally based on whether it was cost-effec-
tive for the European company to acquire the necessary capability. In some
cases, particularly where smaller companies lacked a given capability, it was
not worthwhile for them to acquire a skill with limited potential for future

production. 164

As another example. General Dynamics manufactures the entire forward fuselage
for all aircraft in the U.S. since there were more changes in this part than
any other. With a single manufacturer it was easier and cheaper to react to

changes. 165

GD also faced problems in placing work on composite materials with the EFI.
Fokker had been expecting to produce landing gear doors of carbon fiber, but
as an economizing effort, GD reverted to standard sheet metal for the doors.
In GD's attempt to place composite work in Denmark, three Danish firms tried

Chapter 12
B-113

it and dropped out on their own. The firms weren't anywhere near competitive
with the experienced U.S. firms and the investment required would have been
much higher than the value of work available on the F - 16 program could
justify.

Summarizing the benefits to the European companies in technology transfer, the
USAF position was that they have acquired better production and production-
rate techniques as a result of participating in the F-16 program. They have
acquired new technology, business and management methods and broadened their
business bases. Major mutual benefits to the four countries and to the United
States include closer international partnership, a step towards improving NATO
rationalization, standardization and interoperabi 1 ity, and increased sales.

Chapter 12
B— 114

14. GD 1 s U.S. Suppliers and Their Second Tier European

Subcontract Efforts

Twenty eight U.S. suppliers of GD were handed the resonsibi lity for selecting
and managing their own suppliers in Europe. Whereas an original total of only
174 European aircraft was to be assembled at each of the two European assembly
lines, most participating European manufacturers were producing components
from the beginning on the basis of 998 aircraft (650 U.S. and 348 ERG).

a. Westinghouse

Each ERG wanted its appropriate share of production of high technology ele-
ments of the system - particularly the Westinghouse radar - while still not
significantly contributing to an increase in the cost of the aircraft. Westing-
house had- devised a system of six separate electronic boxes that could be divided
readily among subcontractors. However, due to the developmental stage which
the radar program was at, and the originally uneconomical quantities of those
items to be built in Europe, Westinghouse was unable to bring European prices
down to an acceptable level. The bids of some Belgian companies were as much
as 50 percent higher than Westi nghouse1 s prices. Since the multinational agree-
ment requires European coproducers to be "reasonably competitive" in price,
several Belgian companies' bids were rejected, causing an irritating embarrass-
ment to their government.

To make matters worse, by the Fall of 1976, when many of the coproduction arrange-
ments had been sown up, Norway and Denmark were complaining that their industry

Chapter 12
B- 115

was being short changed, and so Westinghouse found itself obligated to make up
work distribution short-falls in other parts of the program. Therefore, by
late 1976, with production lead time constraints rapidly closing in, it was
apparent that Westinghouse would have to place larger quantities of fewer items
with fewer European companies (while still maintaining at least some in-house
production of all elements). Belgium was the government that had to bite the
bullet, dropping two of its three prospective firms (one of which was Westing-
house's own Belgian affiliate in that country, ACEC) .

The Geddes article in the November 1979 issue of Interavi a singled out two of
Westinghouse* s three EPI subcontractors as examples of the high level of tech-
nology transferred. N

MBLE of Belgium, which makes the Westinghouse radar computer, acquired the
Hewlett Packard 9500 autommated test capability, an industry standard for inte-
grated circuits in the U.S. Other benefits to the company are said to include
Westinghouse automatic test equipment, production control and configuration
control, meriting the label "substantial" for the value of the transfer. Tech-
nology not transferred to MBLE and others included the manufacture of multilayer
printed circuit boards and integrated circuits. 166

Even manuf acturers such as Hollandse Si gnaal apparaten of the Netherlands are
thought to have benefited from techniques such as numerical control machining
and brazing; automatic RF test range procedures and equipment; acceptance test
procedures and equipment; configuration control and quality assurance. It was
said by the USAF, specifically of Si gnaal, that their version of the Westinghouse
radar antenna is superior to the unit made in the United States. 167

Chapter 12
B- 11 6

b. Marconi -Elliott Avionics

One major European firm participating in the F *16 program falls into a cate-
gory separate from the others in that its participation was not a consequence
of the eonsortiumm purchase decision. The UK's Marconi -Elliott Avionics designed
and produces the head up display (HUD) for the F-16. Marconi is listed as a
U.S. subcontractor and is not a second source as with the EPI's.

Marconi -Elliott brought to the program its previous experience with the Anglo-
German-Ital i an Tornado multi -role combat aircraft (MRCA) which taught the firm,
among other things , to keep the number .of people in the control loop low. As
a result it has structured its F-16 EPG subcontracting work so that each single
unit is built in one nation, eliminating the situation where parts and pieces
from various nations have to be integrated into a unit.

As part of the U.S. offset effort, Marconi signed subcontracts with two EPI
firms in mid-1976; Kongsberg Vapenfabrikk of Norway and 0 1 del ft of the
Netherlands. The two firms work from Marconi -Elliott drawings and data sheets,
and are responsible for their own procurement and materials sources. In con-
trast to the situation between GD and its EPI subcontractors, Marconi assumed
responsibil ity for translation and converting measurements on drawings.

c. Menas co

Sane North American subcontractors of GD were forced to create their own poten-
tial competitors. Menasco Manufacturing Co., for example, found that no company

Chapter 12
B— 11 7

in the four NATO countries is a specialist in landing gears. Menasco therefore
had to teach OAF, a Dutch truck manuf acturer , how to make landing gear compo-
nents. DAF started with an injection of Menasco' s know-how and a $26. 3-mill ion
order, which represented half of Menasco1 s own piece of the fighter as of that
time. The manager of DAF's special projects division Peter Hothuizen felt,

"This opened the way for DAF to make landing gears for other planes in the
future."

Bearing out this optimism, DAF was willing to put up a new factory wing and
invested $6 million in production equipment. Though DAF turns out components
for German military armored vehicles (see Chapter 11), it is not nearly as
exacting as the F-16 work. "The Germans send us a big package of drawings and
if there are any problems, we communicate", says Holthuizen. But landing gears
are such a crucial part of the fighter that Menasco will base six technicians
in the Dutch pi ant

DAF is also among the cases that the USAF has used as an example of introducing
new technology and capability into the EPI. DAF acquired capabilities in numeri-
cal controlled machining; fabrication techniques with new alloys; anodizing;
titani um-cadmi um/chrome/nickel plating; heat treating; manufacturing control
and quality assurance. The measure of transfer gets the rating "maximum". It
is probable that DAF will compete for new landing gear contracts for years to
come. 170

Chapter 12
B- 118

Hamilton Standard

Like other U.S. subcontractors , the Hamilton Standard division of United Tech-
nologies had to bear all the expenses of finding a coproducer for heat exchangers

In Sender borg, Denmark, it discovered Quitzau which had never made aerospace
gear, but its skills were close enough to win a $4-million contract and Hamilton
Standard's production technology.

Quitzau, which has limited capital, is renting a $120,000 vacuum braising oven,
which is made in the U.S., so that it can do the F-16 job. This arrangement
exemplifies the fact that a substantial portion of the money going into Europe
actually comes back to the U.S. to pay for raw materials and production equipment
But for the Europeans, the coproduction contracts represent a technical step
upward and the probability of American orders for years to come. 1^1

e. The Case of Danish Industry

It is in the area of avionics that Denmark, which has the lowest offset return
in dollars and jobs, is said to have done well. This covered a wide range of
subsystem and component technology transferred. B&W Electronics builds the
Lear-Siegler flight control computer, the Westinghouse radar control panel,
the Rosemount pneumatic sensor assembly and ice detector. The measure of tech-
nology transfer on the last two items is rated "low" by the USAF, but the com-
puter and radar panel are thought to provide a substandial transfer. New tech-
nologies or capabilities gained by B&W include manufacturing, planning and

Chapter 12
B— 119

control; printed circuit board cleaning procedures; flow soldering; controlled
paint facility; tooling and test equipment; multilayer board assembly; production
procedures; and quality assurance . 172

f . Lower Tier Procurement by the EPI in the U.S.

All the integrated circuits and many other components used by the European
suppliers are made in the U.S., primarily because there are very few compan-
ies, even there, with the capability or desire to build to military specifica-
tions. Philips in the Netherlands had the capability but not the military
qualification. The company was given the choice of qualifying or buying inte-
grated circuits and chose to buy, presumably on the grounds that the invest-
ment required to qualify was not worth the return. Many of the multilayer
printed circuit boards are also imported even though European boards are said
to be as good as American ones. 173

Chapter 12
B- 120

15. Pratt & Whitney's European Subcontract Effort

The Pratt & Whitney FIDO engine for the F-16 was already in production when
the F-16 airframe entered engineering development since it is the same engine
used on the earlier (and more sophisticated) F-15 fighter. This naturally
made its task easier than that of GD or Westinghouse. After surveying 40 firms
from among the EFI's, Pratt & Whitney selected one from each EPC:

Country

Firm

Contract^

Value

Work

Belgium

Fabrique Nationale

5836M

inlet and fan module,
core engine module,
and engine assembly
and test

The Netherlands

N. V. Philips

S142M

after burner, and
exhaust nozzle module

Denmark

D1SA

$38M

main gearbox module

Norway

S163M

fan-drive low-pressure
turbine and shaft
module

The modular design of the F100 engine, intended to facilitate maintenance and
to reduce the number of spare engines required is advantageous as well for
joint production. ^

P&W selected its four EPI subcontractors, and assigned work, on the basis of
their capabilities. Early in the offset negotiations Pratt & Whitney informed
the EPG's that there was no efficient way engine work could be distributed
proportionally among the 4 EPI's. So, as it turned out, Belgium's Fabrique
Nationale (FN) alone received around 71% of the engine work and contributed in

Chapter 12
B- 121

good part to Belgium's disporportionately large share of total F-16 program
work placed with the EPI's. The engine work in turn accounts for around half
of all Belgian work. FN had been heavily involved in the license production
of engines for such earlier collaborative projects as the Rolls Royce Tyne
engine for both the Atlantic Maritime Patrol Aircraft (Chapter 5) and Transall
C-160 military transport (Chapter 8) projects, and the General Electric J79
engine for the F-104G fighter (Chapter 7). 176

Even though the European assembly line for engines is at FN, each of the four
EPI subcontractors are individually responsible to P&W directly. P&W in turn,
is responsible to the U.S. Government who provides the engines to GD as gov-
ernment furnished equipment (GFE).

Initial P&W preparations for European production of the F100 were completed by
mid-197-Z. and included:

converting the dimensions on drawings— dual English/metric dimensioning
was used;

translating the labels on drawings into French, Dutch, Danish and
Norwegian;

translation of operation sheets;
tooling layout, and;

training of some of the European workers.

FN is moving into FIDO production in three phases, manufacturing more of the
engine components itself in each phase.

Chapter 12
8-122

The first FN produced engine under Phase 1 was scheduled for completion in
September, 1978, after having been run in June, torn down and inspected, reassem-
bled and run again. This cautious approach was to continue for several years
until the confidence level had been built up. The first complete engine under
Phase 2 was due in February 1979, and under Phase 3 for January 1980. FN pro-
duction of FIDO's for the EPG F-16's was to rise to a maximum of 8 per month
by August 1980, and decline to 5 per month in late 1983 with the last sched-
uled for November, 1984.

Those components FN is not manufacturing will be supplied by either P&W or the
other three EPI engine participants. The four EPI's collectively were guaranteed
a nominal offset of about 43% of the value of the 438 F100 engines for the 348
EPG F-16's. In actuality though the EPI subcontractors are allowed their own
make-or-buy decisions for their components, according to the amount of capital
investment they believe it prudent to make. Consequently the four EPI engine
subcontractors will collectively produce only about 25% of the value of the
438 engines. In line with the overall program offset, however, the EPI's will
get 10% of the value of the FIDO's produced for the USAF's 650 F-16's and 15%
of third country sales .^7

The EPI's building of parts sets for the USAF F - 16 F100 engines will rise to a
maximum of 9 per month in 1981, and end in early 1983 when the last of the
initial USAF buy of F-16's rolls off the line.

P&W' s contracts with the four European firms are fixed-price with inflation
escalator provisions.

Chapter 12
B— 123

This type was chosen as the simplest way to bridge the gap between
the accounting systems used in Europe and the one used by Pratt &

Whitney. The Europeans did not want to change their accounting sys-
tems to track costs all the way through, as would be required for
cost-plus-fee contracts. Also, European companies generally tend to
be more reluctant to part with financial data than are U.S. firms.179

Pratt & Whitney was satisfied with capital investments of the 4 EPI subcon-
tractors. All four of P&W's EPI subcontractors gained new technological capabi 1
ities from the program. In 1977 Lawrence W. Clarkson, P&W's vice president
for the consortium program cited as examples of this, the materials, toler-
ances and manufacturing controls which involved new manufacturing techniques
for the Europeans. Fabrique Nationale is receiving significant experience in
high volume operations with titaniim and nickel alloys, and manufacturing to
the higher temperature and pressure ratios at which the engine is built to
operate. __ DISA, with the experience it was gaining in the production of gear-
box modules, was expected to create the potential for a new product line, there
being nothing comparable available elsewhere in Europe. 178

FN not only assembles and tests the F100 engine but has a major share of what
engine related manufacturing there is in the EPI. FN manufactures the engine
inlet fan module and the engine core module, after which it asembles and tests
the complete unit. A substantial level of technology was transferred to this
company including titanium welding and grinding; Pratt & Whitney's pack coat-
ing and flame spray process; Inconel 100 machining; stator bronzing; electric
discharge machining; broaching; production control; f i xtures , tooling and test
equipment; and the company acquiried a new engine test facility. Technology
not transferred to FN included directional solidification; gatori zing; and
investment casting.

Chapter 12
B- 124

The transfer of certain advanced technologies to the Europeans, however, is
being restricted by the U.S. Air Force for security reasons and by Pratt &

Whitney to protect proprietary data and know how. Foremost among these are
the Nickel-based superalloy blades for the two-stage high-pressure turbine
which are made from directionally-solidified investment castings. Directional
solidification is a state-of-the-art Pratt & Whitney patented technique for
longitudinally aligning the metal grains by gradual withdrawal of a casting
from a furnace. Pratt & Whitney supplies the directionally solidified turbine
blade castings to Fabrique National e, which then performs the detailed

machining. 179

Another restricted technology is an isothermal pressing technique for super-
alloy powder to form superalloy billets of materials such as IN 10 nickel alloy
that are virtually unforgeable. P&W supplies gatorized turbine disk billets
to its E’uropean partners for machining.

As only a small number of components for the F100 engine are actually manufactured
in Europe there were a number of complaints from European companies. Several
companies had an opportunity to do more, and one possible reason why they did
not was offered by in November 1979 Interavi a article as caused by the way in
which Pratt & Whitney presented the program to the European suppliers. This
is said to have created a negative outlook on fabrication, which is now

regretted .180

As an example, the Dutch firm. Philips, was cited. Philips has a reputation
as a high-quality, very experienced electronics company; yet out of the 120

Chapter 12
B-125

parts in the engine augmentor module (af terburner ) , the company chose to build
only 18. Of these 18, some have high technology in them. Pratt & Whitney
buys most of these parts and it is possible that it was too expensive for Philips
to acquire the technology. Among the new technologies or capabilities that
Philips is stated to have acquired by building the augmentor are titanium and
waspalloy welding, titanium machining and Pratt & Whitney's flame-spray process.
The measure of transfer of technology is described as "minimum", which speaks
for itself. Technology not transferred includes titanium hot forming. 181

As with General Dynamics, P&W was also responsible for updating management
systems for its European subcontractors, an example of which is the computer-
ized on-line, real-time job-control materi al -f low scheduling system being devel-
oped with Fabrique Nationale. Data from the computer at FN's Herstal plant is
transmitted to the P&W's office in Brussels and then via satellite link to
Pratt & Whitney's Manufacturing Division in East Hartford, Connecticut. This
permits the managers in Each Hartford to know where all the components are and
their state of fabrication as they pass through the Belgian shops , from raw
materials inventory to finished goods inventory, where the first Belgian-made
F100 parts have arrived. The same is done with the assembly process. Similarly,
data from Fabrique Nationale' s engine test cells is linked to East Hartford
and then to West Palm Beach for monitoring by the engineers. 182

Also, to keep the U.S. and European F100 management in step, there are identi-
cal "corrmand posts" -pi an ning/ chart rooms — in West Palm Beach and in the FIDO
office in Brussels. The actual planning work is done in Brussels, and the
changes are sent by teleprinter to West Palm Beach to update the charts there. ^3

Chapter 12
B- 126

Coordination is further ensured by Pratt & Whitney's stationing of people at
the other three European subcontractors plants to track scheduling and manfac-
turing control. Altogether, P&W had about 30 people in Europe for the F100
program (as of mid-1977)-including 12 in Brussels and 13 at Fabrique Nationale,
and planned to add a dozen more quality control experts by the end of 1977. I84

Additional Pratt & Whitney personnel shuttle to Europe for special short-term
tasks on United Technologies' corporate 727. 188

In December, 1980, the first and only case of termination for default of a
major European subcontractor for the F - 16 Multinational Fighter program occurred.
Pratt & Whitney terminated its $25 million contract with Dansk I ndustri Syndikat
(DISA) for the production of accessory drive gearbox modules for the F100 engine
after the company failed to meet revised delivery and cost schedules. Reasons
cited irTAerospace Daily by Pratt & Whitney's David Hymer, director for Multi-
national Programs, for the termination was that the company was unable to meet
schedule requirements for the FIDO engine. There was also a cost issue, Hyner
said. DISA "was, in fact, losing money on the program". Hyner said P&W wasn't
happy about terminating the agreement. "We tried for the better part of a
year to salvage it", offering "a great deal of technical assistance", but to
continue "would not be fair" to buyers of the F -16. l8^

As DISA' s problems continued, "our obligation under the contract diminished",
Hyner was quoted as saying, and eventually "it became evident that we had reached
the point where decisive action was required", so the agreement was ended . I8?

Chapter 12
B-127

DISA had been having difficulties with its contract almost from the beginning
of the program. Most of the other European countries involved in the project
had had problems too, but they began disappearing in about 1978. DISA's didn't.
As a result, says Hymer, it was the only company "that has not been effective
or efficient" in its F100 work. 188

"The reasons, perhaps, are many", he said. Among them are the fact that the
product itself is demanding and "requires the proper management and support".

DISA "didn't do either very well". It had been picked in the first place on
the same basis as all the other F-16 subcontractors, being judged as capable
of meeting its contract. 189

Problems first began to surface according to another source, when DISA selected
a less expensive and more versatile gear cutting machine than the highly special-
ized on e~~re commended by P&W. A high rejection rate ensued and DISA found itself
having to buy gears from P&W at a premium to cover the shortages .190

The Danish company said contract termination would lead to layoffs of about
100 workers. Cancellation of the DISA gearbox contract came at a time when
the Danish media and Parliament were screaming about the skyrocketing costs
for Danish participation in the F-16 coproduction program and the country's
having received the short end of the stick in offsetting contracts .191

Inflation and rising dollar exchange rates had increased the price of the F-16
by about 28% in the previous year alone.

Chapter 12
B-128

Certain Danish politicians were once again charging that the U.S. had failed
to live up to the intent of the agreement to provide compensating work to Danish
industry in line with that of the other EPI's. Although the issue was several
years old by then, the weakening of the Krona vis-a-vis the dollar and the
loss of a major share of an already limited share of the work served to exacer-
bate things .192

Horner said that gearbox production work would be picked up by Pratt & Whitney
in the U.S. with no slippage in delivery schedules for the F-16 1 s . 193

P&W, which already had been producing the majority of FIDO gearboxes, compensated
for the loss of DISA by making its share of the units. There was no interruption.
But Hyner stressed at the time, "Pratt & Whitney feels an obligation to put
all the work back into Denmark". 194

Still, Hyner felt that having the work done in Denmark was the ideal solution.

On the other hand, "Whether we can put all the work back (in the country) is
the question."

Some four months later, in late April 1981, Pratt & Whitney had not yet found
a Danish successor to DISA for the production of the F100 gearbox module. Given
the small size of the Danish aerospace industry and the difficulty of producing
the gearbox module, Pratt & Whitney was considering by that time awarding the
contract to a non-Danish firm and arranging for Denmark to produce a different
component for the F-16. 195

Chapter 12
B— 129

Pratt & Whitney had meanwhile been wrestling with another EPI problem. By the
end of July 1980 Fabrique Nationals had delivered 83 engines, being 20 engines
behind schedule. 181 FN was attempting to recover and get back onto the original
schedule by the following January when it was hit by a strike in September
1980 and then again in February 1981. By the end of March 1981 FN had deliv-
ered 127 engines to Fokker and SABCA, but was by then 30 engines behind schedule.
At that time, however, a Pratt & Whitney spokesman was able to announce that
the aircraft production schedule had still not been impacted. Baring any further
strikes, FN was hoping to be back on schedule by January, 1982.196

Chapter 12
B - 130

16. Schedule and Cost Problems Emanating from the European Socio-Labor
Environment and Rapid Production Startup

a. The Socio-Labor Environment

General Dynamics was rudely surprised by the Europeans' shunning of multiple
shifts and overtime in favor of long, steady employment. Europe's socio-labor
environment is marked by: strong employee unions; many different unions repre-
senting skilled and semi-skilled workers; a high rate of unionization (70 -
75% of employees) including supervisors and middle management; a heavy reliance
on industrial courts and/or arbitrators; a 38 hour work week; little overtime;
one shift a day; and factories that shutdown for one month every year when the
entire work force goes on vacation (while the random U.S. pattern has little
impact on production ). 197 The goal of steady, long-term work is embedded in
the laws of most European countries, where the tax structure has a more progres-
sive rate structure than in the U.S., offering less incentive for employees to
work overtime, and companies must bear enormous severance payments for anyone
who is laid off. Whereas any American corporation that has operated in Europe
is well aware of these basic facts and their ramifications vis-a-vis skill
levels, tooling up and schedules. General Dynamics had never before operated
there .

In contrast to the U.S., where the aerospace work force is hi ghly mobi 1 e, going
to wherever the contracts are, in Europe most firms have extremely low turnover
rates. This results in generally higher skill levels among workers in Europe.
The Burchfield study cited as an example,

Chapter 12
B- 13 1

Machined parts produced by Fabrique National e under a subcontract
and the supervision of Pratt-Whi tney provide finishes far greater
than required by the drawings and specifications. This was similar
at other manufacturers under contract with General Dynamics. 138

The other two major consequences of these differences between the U.S. and
European socio-labor environments involve the amount of duplicate tooling and
the longer production times required. On the first of these issues Kraar pointed
out.

The NATO countries bought the F - 16 for a guaranteed maximum price of
$6,091,000 apiece (in 1975 dollars), including the cost of special
tooling for European production. General Dynamics, however, calcu-
lated these expenses on the basis of its own multiple-shift opera-
tion in Fort Worth. Because the European coproducers operate mainly
on a single-shift basis, 139 they require nearly twice as much tool-
ing as General Dynamics originally estimated. None of the purchas-
ing nations wants the political embarrassment of raising the offi-
cial price. With some deft sleight of hand, the European govern-
ments are quietly picking up the extra tooling expenses and not count-
ing it as part of the F -16 price. 200

Gen. Abrahamson cited schedule generally as the most critical parameter facing
the program, and especially the longer time it takes to build subassemblies
and aircraft in Europe. For the aircraft coming off the two European assembly
lines it took 36 months as opposed to 26 months for the U.S. produced air-
craft. Consequently, the proper meshing of production schedules on both sides
was a major planning and managerial task for the two U.S. prime contractors.

General Dynamics had to offer the Air Force estimates as to the cost of making
the plane in Europe prior to their having fully grasped how European manufac-
turers operate.

Only when the European companies started bidding on their shares of
the F-16 did General Dynamics finally realize that the lead times
would be longer and the costs higher than expected.

The belated awareness of European work habits had a far-reaching
impact. "Suddenly," says Schei deman, "all the integrated schedules

Chapter 12
B- 132

that we'd worked out didn't fit, and a whole year's work was knocked
out," It took tedious reshuffling to keep the planes ordered by the
U.S, Air Force on schedule, for many of them are slated to have Euro-
pean components. Unless the output in Fort Worth and in the overseas
plants meshes precisely, remarks a General Dynamics production expert,
"we'll end up with a fighter that has no center fuselage."201

b. Solutions

This problem was resolved in two ways:

1. European manufacturers began tooling and manufacturing preparations ahead
of their U.S. counterparts wherever possible, and;

2. The first planes destined for the USAF were to be of 100% American compo-
sition instead of 90%.

After several years when the European manufacturers catch up, they will be
compensated with a larger share of components in the later American-built planes
than was“ori gi nally contemplated.

Burchfield in his March, 1979, study for USDR&E stated.

The environment in Europe is considerably different than the U.S.
and must be considered. For example, the nations do not consider it
a serious problem to miss a production schedule. Approximately 40%
of the F-16 line items on contract in Europe are behind on estab-
lished production schedules. These shortages are generally being
made up by the U.S. prime contractor and subcontractors . Not meet-
ing production schedules can be a serious problem when a manufac-
turer in another country is dependent upon the item being produced
to meet another schedule.202

The European subcontractors have continually displayed over optimism vis-a-vis
the time required to get up to speed on a given task, manpower requirements ,
and schedules in general. It. Col. Kehl of the F-16 SPO felt this was in part
explainable by their not being used to having to live with the close surveil-
lance of an AFPRO forcing them to be constantly accountable for commitments.

Chapter 12
B - 133

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c. Engineering Changes

Setting up early for second source production in Europe however, involved the
aggravation of an already serious problem. The F-16 had only recently entered
engineering development when the consortium selected the F-16. Still in the
developmental phase when the EPI started manufacturing, numerous engineering
changes had to be incorporated by the EPI. Carrying out these changes in parts,
tooling and manufacturing processes caused numerous problems for both U.S.
industry and EPI 's.

The afore mentioned GD decision to retain the manufacture of the forward fuselage
at Fort Worth for all F-16's was an attempt to alleviate this problem. With
the high rate of change activity in this section of the airframe, it was better
to have only one manufacturer.

Burchfield came to the following conclusion

"Full scale development should be completed before establishing
coproduction in such a consortium arrangement because of the com-
plexity of development changes, effect ivity of these changes, and
related costs. This also requires concurrent changes in hard tool-
ing by both the US and foreign nations. Changes such as these cost
approximately 100 times as much as when the development is finalized
and changes are incorporated before production begins. "203

Although in an ideal situation this would be the logical course to follow, the
fact that this problem has resurfaced repeatedly in collaborative programs,
from the Hawk and F-104G Starf ighter programs of the early 60' s to the Roland
and F-16 programs of the late 70' s would lead one to suspect the choice isn't
all that simple. In all these projects there seems to have been an element of
surprise in the reactions of the recipients of the technical data package (TDP)

Chapter 12
B-134

(be they subcontractors or licensees) to the proportions assumed by the lack
of the configuration stability (and therefore maturity of the TDP being
transf erred ) .

In any case, even if adequately foreseen, the choices would have been less one
of avoiding the problem, than figuring into the equation the inevitable disrup-
tion and cost involved in engineering changes caused by the demands of the
replacement schedules of the user armed forces, and the work load/capacity of
the industries that are to serve as the second source. Consequently, these
and other factors have to be properly assessed early on in the project. With
eyes opened to this delemna, tradeoffs can be made which permit the program to
chose the lesser of evils and to minimize, not avoid, any resultant disruption
caused by the heavy flow of engineering changes emanating from the develop-
mental phase and early low-rate production.

Chapter 12
B— 135

17. Other Issues Bearing On Transnational Subcontract Management

a. Intra-Consortium and Intra-Country Distribution of Contracts

Though the total value of offset contracts placed in the four EPC's has been
satisfactory, vis-a-vis approaching the 58% goal, there has been an imbalance
among the four countries. Belgium and the Netherlands, with established aero-
space industries, have the highest proportions, especially the Walloons. Norway
and Denmark have done much worse. It must be remembered however that the MOU
placed an obligation on the U.S. to place offsets in line with the 10/40/15
formula, for the consortium countries as a whole, not on a country-by-country
basis .

As of Spring 1977 with roughly 90% of the contracts earmarked for the EPI's
having been awarded and totaling a value of $2.09 billion, the country order/
work shares were as follows: 204

Country
Bel gi urn

The Netherlands

Norway

Denmark

% of total EPS
348 Aircraft
Order

33%

29%

21%

17%

% of Contracts
Awarded to
EPI's

57%

22%

14%

7%202

As we saw with the case of Westinghouse, those U.S. subcontractors caught in
the final squeeze, when the USG tried to somewhat rectify this imbalance through
those contracts yet to be awarded, had their already difficult tasks further
comp! icated .

Chapter 12
B— 136

Intra-country as well as intra-consortium distribution also proved to be an
issue. Even with the award of the lions share of the work to Belgian firms,
the Belgian government wanted to placate the countries regional rivalry by
providing contracts to the Dutch-speaking Flemish north as well as the French-
speaking Walloon south. Since almost all of the Belgian aerospace industry is
located in the Walloon area, this special requirement proved to be virtually
impossible to satisfy. (This ethnic division had previously entered the
picture during the evaluation period of 1974-75 with a Flemish bias toward the
U.S. aircraft and a Walloon bias toward the French one, but reversed itself
in 1982 during another foreign aircraft evaluation, this time for replacement
of the Mirage V, the Walloons having since become entrenched on the side of
the F-16. )

Another case of intra-country distribution that originally concerned General
Dynamics-, was the socio-political requirement of Fokker to spread its portion
of F-16 parts and assembly among six widely scattered plants.

b. American Technology Being Bureaucratic and Out of Proportion to the

Smaller EPI

Another major concern expressed by the EPI's was that of being overburdened
with paperwork from the U.S. SABCA's Managing Director, Pierre Georges
Willekens stated, "We can't afford to pay that much for something that lends
nothing to the quality of the product and does not increase the value of the
product. "

Willekens felt that the EPI's could,

be more competitive with the U.S. if the generally smaller European
manuf acturers were not burdened with the administrative workload

Chapter 12
B- 137

involved in this program. Because these companies generally are
much smaller than their U. S. counterparts, he said, "the administra-
tion system applied by the U.S. government is out of proportion to
the activities in our country."

Willekens estimated that these reporting functions may account for up to 30%
of total system cost. He conceded however, that detailed reporting was necessary
in some areas.

"This is the first time we have worked with fracture-critical parts,"
he said. "We need to keep records on this. Okay— there is a minimum
that must be done here. 205

Kate Galle, a Danish Ministry of Commerce representati ve involved in the program,
further observed,

My impression is that American technology is very bureaucrati c.

This is very strange to us. It limits participation by smaller
firms unable to handle the paperwork burden. 206

Representatives of the CASE UR office in Brussels conceded that,

European contractors feel a bit over-managed as a result of the large
U.S. onsite teams and reporting requirements.

But it's the price you pay to do business in this program," asserted
Lt. Col. Ronald A. Fullerton, deputy director of the office. "We
would like nothing better than to have complete confidence in all
the European subcontractors, and not have to do this. 207

The Deputy Director suggested, however, that,... "as confidence grows with
experience, some of the requirements may be relaxed. "208

c. Loadi nqs

Some European subcontractors had difficulty competing with the U.S. industry
because of the U.S. industrial practice of adding charges to production costs
to cover administration, overhead, profit and handling. These charges are

Chapter 12
8-138

called loadings and are added each time an item is handled. For the F -16
program, U.S. subcontractors handle many items more often than ordinarily;
shipping them to, and receiving them from Europe. This problem first surfaced
in early 1976 for the F-16 program. The issue arose over the impact of loadings
on GD's U.S. suppliers' ability to place an adequate amount of work on a reason
ably competitive basis with the four European Participating Industries (EPI).
Initially, U.S. suppliers pointed to the premium, one which began to increase
exponentially past a certain minimal amount of easily second-sourced work, as
the major impediment to placing an adequate amount of work with the EPI. The
EPI retorted, however, through their respective governments, that it was not
their bids per se that were pricing them out of the action, but the loadings
placed on their proposals by the first tier U.S. suppliers. The European
Participating Governments (EPG) protested on their own behalf as well over the
impact that these loadings would have on the price of their F-16 aircraft, 40
percent of which was to be EPI content (this figure was only 10 percent of
USAF aircraft).

The U.S. Government's position on all this was that the extra charges by U.S.
suppliers were totally legitimate. They reminded the EPGs that, although there
had been initial controversy, they had already agreed to accept the cost account
ing principles contained in the U.S. cost accounting standards (CAS), and the
USAF was able to ascertain that the U.S. contractors had been consistent in
applying the relevant factors. Furthermore, a great deal of study was subse-
quently done by the USAF to make sure there was no double costing. The results
of the study showed that loadings had been properly applied in all cases.

Though conceding their legitimacy, the U.S. Government has continued to try to

Chapter 12
B— 139

minimize loadings and has maintained close surveillance assuring that they are
applied only in proportion to the value-added at each stage.209

The ERG, for their part, have continued to be accutely aware of loadings with
the issue tending to resurface periodically. 2^°

The EPI production effort, and U.S. industrial management of it, are highly
decentralized. GO feels any premium paid for this structure is well worth the
cost given the constraints under which the program has had to operate. The
one-to-one teaming, though involving substantial loadings, has been effective.

If the loadings weren't there, they would be replaced by royalties on the data
and know-how transferred. GO believes one must be cautious not to denigrate
the services provided by the U.S. vendors. 2^

General Dynamics has not gone direct to its second tier EPI suppliers follow-on
for spares either — even though acknowledging they would save on the loadings,
extra time, and elongated communications chains resulting from the intervening
layer of U.S. industry — for several reasons. The first two being strategic
(long-term impact on the program's and corporation' s business base) and the
latter two are more operational in nature. 2^2

The first and most important reason cited by GD was the impact this would have
on their program and overall business relationships with their U.S. suppliers.

Of particular importance was GD's high degree of dependence on suppliers to
support future marketing efforts that involve co-production. If GD took business
away with one foreign country sale, there is the danger that GD might do the

Chapter 12
B-140

same with another country; after the U.S. supplier had assumed the trouble and
risk of setting up a future competitor. The other policy consideration was
the dangerous precedent such a move would create with regard to AFLC and the
possibility of AFLC being tempted to cut GD out of the loop prematurely at
some future date for spares. 213

There were also operational issued which were of import to GD's decision not
to go direct for spares. They involved: (1) industrial property rights (IPR)
and (2) configuration and engineering management. On the first point, assuming
that the drawings were not proprietary (but were U.S. Government owned) there
was always the possibility that any royalty for know-how (or other IPR compen-
sation replacing the loading) could approach the original loading. On the
second point, if GD went direct to a firm that is building to drawings, GD
would have to be fully responsible for, or separately subcontract configuration
management and engineering support. This could be of particular difficulty
for the many subsystems for which the design was still somewhat fluid. And
again, GD would very likely find itself having to turn around and negotiate an
engineering management contract with the U.S. supplier. 214

d. Need for Intervention by U.S. Contractor Teams

As with Raytheon's HELIP experience, there has been the necessity to send U.S.
contractor teams over, on emergency basis, to bail out European subcontractors
(often for an extended period).

Chapter 12
B- 14 1

e. Though No EPI Participation in Engineering Development, Technology Transfer
was Significant

As discussed previously, there has been significant technology transfer to the
EPI 1 s during this program. Some individuals among the EPG's and EPI 1 s tended,
however, to down play this preferring instead to emphasize the fact that the
EPI did not have any significant design or engineering development responsi-
bilities where the real gain in technology comes. Complaints included comments
along the lines of, as opposed to being a multinational program, it was just a
glorified subcontracting project, be it a gigantic one. Though essentially
true on the industrial side, as we've already seen, the EPG's did have some
limited input on the governmental side of project management during engineering
development.

In any event this is a totally unjustified criticism since the Danish and
Norwegian governments and industries had never seriously considered assumption
of a role of developmental partners on any new fighter project. While the
Dutch and Belgians had previously considered this option, they were both early
drop outs of the MRCA Tornado project. They had dropped out because they had
not wanted to assume the responsibilities of a partner in the development of a
fighter, knowing full well that their proporti onate shares would have not given
them adequate leverage in decision making corresponding to the investment made
and risks assumed. This was especially true as the requirement would tend to
be one steered more along the path chosen by the British and Germans, one which
was expected to and did lead to fighter tailored to performance char act eri sties
far more expensive than these smaller countries either needed or could afford.

Chapter 12
8-142

Instead they had opted out of development so as to be able to make a better
choice at a later date; allowing them to pick among existing fighters, one
more closely conforming to their performance-cost trade offs, given the replace-
ment schedule constraints.

Furthermore, in spite of the nature of the project for the four EPI being that
of second source production subcontractors, as we saw under the sections and
subsections covering the GD, Pratt & Whitney, Westinghouse and other subcontract
efforts, there is no down playing the considerable transfer of technology
involved.

f . Subcontractor Ownership

In the words of GD 1 s vice-president, Schei deman, "We were as nervous as mother
hens,". . . in approaching the European firms. One of the reasons for this
wariness was the ownership of several of its principal prospective subcontractors
which involved its two competitors; Northrop and Dassaul t-Breguet . Dassault-
Breguet owns half of SABCA, while Northrop owned 10% of Fokker-VFW. In addition
both firms are Dassault partners and subcontractors in several other programs
as well. "But General Dynamics . . . gradually came to appreciate that such
corporate relationships are customary in Europe and do not necessarily influence
other business ."215

Chapter 12
B-143

18. The GAO Report on the F-16

In the fall of 1978, the General Accounting Office circulated a draft report
on the F-16 multinational fighter to the European national participants for
comment before final publication (scheduled for November). This was to
prevent the recurrence of ruffled feathers by the European participants after
the GAO failed to submit drafts of other reports during the two previous
years.

At the same time, the GAO, which had been monitoring the F-16 program, had a
separate research team in Europe to report on lessons learned from current
multinational programs, taking an especially close look at the Panavia Tornado
multirole combat aircraft (MRCA)

The GAO report circulated in draft form included, among others, the following
conclusions:

Foreign manufacturers involved in the General Dynamics F-16 fighter
European coproduction program are being driven up the wall by swarms of
American auditors, quality control specialists, and flight safety
experts.

If coproduction is to work, weapons systems must be uncomplicated and
involvement by Congress and the Pentagon must be greatly reduced.

Chapter 12
B-144

FOXC/Disk 428/Ch. 12/Pg B144-8151

Contrast of the Foreign Military Sales
Arrangement of the F-16 Procran with Arrangements

"A11 and "3"

F-16 ARRANGEMENT

ARRANGEMENT "A-j ”

(CONTRACTOR TO FOREIGN GOVERNMENT)

ARRANGEMENT "A2"
(CONTRACTOR TO CONSORTIUM)

ARRANGEMENT "8"

(NATIONAL CONTRACTOR TO NATIONAL GOVERNMENT)

Source: Gfro t) cj)cf

^ ^ . 5 —”T. ^

aw > n sum ■ pct

Under a new proposal. Congress would approve a memorandum of
understanding (MOU) prior to a project, and then withdraw from the
process. The Pentagon's management role would be reduced. Problem
solving would be on an i ndustry-to-i ndustry basis, rather than
government-to-government , and most of the regulations relating to foreign
military sales would be waived.

The U.S. regulations are partly to blame for a coproduced F- 16 costing "sub-
stantially more" than if it were U.S. produced, a GAO official was quoted as
saying at the time the draft was circulating. Aviation Week & Space
Technology reported at the time that, "Nervous coughing already has been heard
from the Pentagon, where two officers said last week they will "urge caution"
in any reduction of their management role. "21?

The GAO report, entitled A New Approach Is Needed For Weapon Systems
Coproduction Programs Between The United States And Its Allies was released in
its final form on April 12, 1979. It made four recommendations on the basis
of the F-16 coproduction experience, which suggested the need to alter the
present system used to establish and manage such coproduction efforts.

(a) A New Approach

Consider a direct sale approach as the accepted method of U.S. prime
contractors engaged in coproduction programs, thereby removing such
programs from foreign military sales procedures. Under the direct
sale approach, the U.S. companies would contract directly with the
foreign government or consortium buying the product.

Chapter 12
B— 145

FOXC/Disk 428/Ch. 12/Pg B144-B151

Arrangement "A11

An american prime contractor, linked contractually with foreign sub-
contractors for the production of a weapon system, would contract
directly with the foreign governments or government consortium to
produce the weapon systems as agreed in the MOU. There would be no
government-to-government contractual relationship beyond an MOU.

The prime contractor would bear the sole responsibility for the
product. Neither would it be necessary to have direct contractual
arrangements between the foreign contractors and their governments.
This arrangement can take two forms: contractor to foreign govern-
ment (A^) ; or contractor to consortium (A2) .^18

Arrangement "B"

The associated contractors, both U.S. and foreign, would contract
directly with their respective governments. This type of arrange-
ment would be applicable in cases where the foreign contractors are
producing the end products to be purchased by the foreign govern-
ments with the U.S. contractor furnishing parts.

As we saw at the beginning of this project history this was the contractual
approach taken for the prior F-104G project where the Europeans as such opera-
ted as licensees, but it was not repeated for this much smaller non-subsidized
effort.

The report did qualify its suggestions though, pertaining to the various
direct sale options described above by stating that.

In proposing a direct sale approach for coproduction efforts, it
must be pointed out that in some circumstances certain parts of a
program may and should be placed under foreign military sales
procedures.2^9

(b) Timely Congressional Review

Require that a Memorandum of Understanding, signifying the commit-
ment of the U.S. and foreign participants to join in a coproduction
program, be submitted for review as soon as the points of agreement
have been identified. The Congress would either concur by taking no
action or object by disapproving the MOU.229

Chapter 12
B-146

FOXC/Disk 428/Ch. 12/Pg B144-B151

This resulted from the fact that, as required in the Foreign Assistance
Act of 1974, a letter was submitted to Congress in April 1975 notifying
it of a possible F-16 sale to 4 European nations, but not the conditions
of the sale contained within the MOU signed in June.

The congressional notification of the impending F-16 coproduction
program met the legal requirements, but it was not made at a point
in time when all the pertinent data that was later to be included in
the MOU was available for congressional review. Thus, congressional
notification was too early to provide the necessary data.

Under present arrangements, congressional prerogatives are signifi-
cantly restricted after an MOU is signed.... It is evident that in
such cases, emphasis should be placed on obtaining congressional
review of the MOU— it being the basic agreement and, in our view, the
most appropriate document for the Congress to review. 221

Thejreport summarized some of the principal procurement laws and regula-
tions that caused difficulties for the F-16 program and whose waiver or
modification needs to be considered for future ventures of this kind.

The F-16 was one of the first programs in which foreign contractors were
guaranteed a specific share of a system procured by the U.S. government
for its own use (10% in this case) in return for a purchase of the air-
craft by a contractor's government. This made the waiver of the flow
down of ASPR clauses to European subcontractors more difficult.

The MATO AWACS sale originally had similar problems, but these were also
eventually circumvented, assisted by a decision not to use the FMS
approach but instead a direct sale from the U.S. prime contractor to the

Chapter 12
B-147

FOXC/Disk 428/Ch . 12/Pg B144-B151

consortium (Arrangement A-2 above)* a NATO subsidiary organization
including 12 funding governments.

There are two general areas of friction where flow down to foreign sup-
pliers is involved:

(a) The protection of domestic commercial interests:

Prohibitions against purchases of foreign food, clothing, tex-
tiles, specialty metals, or construction of naval vessels in
foreign shipyards (annual inclusions in Department of Defense
Appropriation Acts).

No research and development contracts dealing with weapon sys-
tems may be made with foreign sources when an equally competent
domestic source will perform the service at a lower cost
(Public Law 92-570, sec. 744).

Army supplies are to be made in U. 5. -owned factories or arse-
nals so far as can be done on an economical basis (10 U.S.C. ,
sec. 4532).

No defense funds may be used to buy items other than U.S.-
manufactured items without adequate consideration given to U.S.
firms in labor surplus areas, U.S. small businesses, and the
U.S. balance of payments (22 U.S.C. , sec. 2791).

Chapter 12
B-14B

FOXC/Di sk 428/Ch. 12/Pg B144-B151

Defense supplies must be shipped on U.S. flagships unless
charges are excessive (10 U.S.C., sec. 2631).

Since industrial participation programs involve sovereign nations, the
high visibility of these explicitly discriminatory national regulations
are grating.

(b) Contracting, auditing, and accounting procedures:

Contracts for property and services are to be made by formal
advertising (10 U.S.C., sec. 2304-a) .

Contracts are awarded to the lowest responsible bidder on a
competitive bid basis (annual inclusion in Department of
Defense Appropriation Acts).

No advance payments by the U.S. purchaser unless determined
that such is in the public interest (10 U.S.C., sec. 2307).

"Vinson-Trammel Act," dealing with excess profits in aircraft
and naval contracts (10 U.S.C., sec. 2382).

Contract warranty that no third-party agent was retained to
solicit the contract for a commission or contingency fee (10
U.S.C., sec. 2306-b).222

Chapter 12
B— 149

FOXC/Disk 428/Ch. 12/Pg B144-B151

Other troublesome procedures have included the afore mentioned audit
of contractor records by the Department of Defense, plus the dis-
closure of cost and pricing data.

All parties agree that accountability and consistency must be main-
tained in the accounting practices of each nation, and that program
oversight must be maintained. However, attempts to satisfy the
specific accounting and auditing requirements of both the United
States and the other participating countries have created signifi-
cant problems stemming from national sovereignty prerogatives that
each wishes to retain.

If coproduction efforts are to be a more frequent arrangement
between the United States and certain of its allies, a thorough
review of the appropriate procurement legislation and regulations
should be undertaken by the Congress in order to identify and evalu-
ate the changes necessary to provide the needed flexibility.

The GAO recommended that the Congress consider:

Review appropriate legislation and procurement regulations in
order to identify and evaluate the changes necessary to provide
the needed flexibility for a realistic and efficient applica-
tion to cooperative ventures with foreign countries. It is
expected that foreign participants will take comparable recip-
rocal actions when they are needed to facilitate such

ventures. 223

Chapter 12
B-150

FOXC/Di sk 428/Ch. 12/Pg B144-B151

(d) Establishing Comprehensive Coordination

The GAO further recommended that the President consider, within the con-
text of his current executive reorganization studies, the establishment
of an independent interagency administrative or coordinating mechanism to
provide policy and management guidance and to act as a clearinghouse for
industrial participation programs. 224

The reason given for this was:

The possibility of increased industrial participation programs will create a
tremendous need for close coordination between various branches of the U.S.
Government.... Present administrative arrangements do not appear to offer the
centralized administration that industrial participation efforts needed for
efficient decision making and policy interpretation . . .

Increasing activity in industrial participation programs will require an
interagency or coordinating mechanism that would provide policy and management
guidance, and act as a clearinghouse for industrial participation programs.

The organization could consist of representatives of the:

Department of Defense— implementation of program.

Department of State— foreign policy and security objectives.

Department of Commerce— export control.

Chapter 12
B— 151

FOXC/Disk 428/Ch. 12/Pg B144-B151

Department of the Treasury— international finances and currencies, and

Department of Labor— employment issues. 225

Chapter 12
B— 152

FOXC/Disk 428/Ch . 12/Pg B144-B151

19. Program Status

a. An Overview of the USAF Program and Foreign Sales (1975-1982)

(1) Production Milestones

In January 1975 the USAF selected the General Dynamics YF-16 for
full-scale development as its Air Combat Fighter and awarded the
firm a fixed price incentive contract valued at $418.0 million.

Pratt & Whitney received a similar contract, worth $55.5 million,
for F100-PW-100 engines at the same time. GD's contract originally
called for 15 engineering development models, but this number was
shortly thereafter cut back to eight. 226

The first preproduction aircraft flew in December 1976, and the
eighth and final pre-series F- 16 flew in June 1978. First flight of
a production F-16A was in August 1978, with delivery to the Air
Force the same month. The first Belgian-produced aircraft was
delivered in January 1979, followed by the first Dutch-produced one,
which entered service in June of that year. 227

(2) NATO RSI Payoffs

Congressional hearings for the FY 1979 budget focused in on the
project and trade-offs involved in this major NATO RSI initiative.

Chapter 12
B- 152

FOXC/Disk 428/Ch. 12/Pg B152-B177

Testifying before the Senate Defense Appropriations Subcommittee,
William J. Perry, the Carter Administrations' Under Secretary of
Defense, Research and Engineering (USDR&E) reported in March 1978
that the United States had "not gained economies of production
scale" in the F-16 aircraft production program. Dr. Perry added,
however, that the U.S. is no worse off than it would have been in
producing the F-16 entirely on its own.

The real cost savings would be realized, he intimated, in the amor-
tization of R&D costs and in savings introduced through NATO stand-
ardized logistics, spares and training for the system.

Three months later, in testifying before the House Armed Services
NATO subcommittee. Assistant Secretary of the Air Force (R&D and
Logistics), John J. Martin was questioned as to whether there might
be an adverse effect on the U.S. economy. "I think there may be
some improvement," Martin said. We said the joint F-16 program "in
the long run will mean many more jobs," because of the quantities of
aircraft that will be built.

The witness conceded that F-16 total procurement costs would be
lower if all the aircraft were built in the U.S. — but only if the
total number to be procured were the same as contemplated under the
agreement with the consortium, which both they and the subcommittee
members agreed was an academic proposition.

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In any case, Martin testified, there are offsetting advantages in
sharing the manufacturing. In addition to beefing up NATO ' s tacti-
cal airpower, and the benefits of standardization, there is recoup-
ment of much of the F-16 R&D cost — slightly more than $500,000 per
aircraft — and other recoupment on support equipment.228

(3) Signing of the Four LQA's in 1977 and the Exercising of Options in

1978

The four EPG's decided on the F-16 over the French and Swedish con-
tenders and each signed the MOU with the U.S. in early June 1975.

The U.S. government's four Letters of Offer and Acceptance (LOA)
were signed by the EPG's almost two years later. Norway signed its
letter of offer and acceptance May 2, 1977 for 72 F-16' s; the
Netherlands signed May 3 for 102; Denmark, May 4 for 58 and Belgium,
May 5 for 116 for a total of 348 aircraft (including options for 42
fighters) .

The signing came after an easing of financing terms by the U.S. gov-
ernment as a result of recommendations of the Multinational Steering
Committee. This was accomplished by waiving the reserve cash in the
initial payment for termination protection, by offering options on
when full-scale development recoupment will be paid, and by estab-
lishing banks in each country to assure fast payment to
contractors.228

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For R&D recoupment the countries now had a choice on prepayment,
payment on time or late payment, but still to be settled was the
issue of interest on these progress payments.

In July of the following 1978, the Pentagon was able to announce
that the EPG's had picked up their 42 options on the F- 16 fighter,
assuring that the total buy would be 348 aircraft. This 42 aircraft
option included 16 for Belgium, 10 for Denmark and 18 for the
Netherlands.

(4) The Order Book as of 1982

As of 1982 the order book for the General Dynamics F-16 Falcon was
as follows:

USAF

EPG

Third Countries

2333 (planned) Belgium Egypt - 40

(of which 831 were 160 (116 + 44)
already procured)

Denmark Israel -75+75

Netherlands Korea - 36

156 (procurements of 102 + 54)

57 (additional planned)

Norway Pakistan - 40

Venezuela - 24

Turkey - 160

For more on the sale to another NATO member, Turkey, and the offsets

involved, see Chapter 11.

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(5) The 1982 Multi-Year Procurement Contracts

Following the Reagan Administration's entering office, the
Pentagon's proposed budget for FY 1983 and five-year plan reflected
large increases in orders for the F-16, the Navy /Grumman F-14, and
the Air Force/McDonnell Douglas F-15 aircraft procurement programs.

In drafting and approving the new defense program sent to Congress,
the Defense Department and the Administration approved procurement
of a total of 2333 F-16s, an increase of 945 over the 1388-aircraft
program planned up to that point, 845 F-14s, up 348 from 497, and
1107 F-15s, up 342 from 765. 230

On January 26, 1982, the Air Force and General Dynamics signed the
first of two contracts for the multi-year procurement of 480 F-16
airframes between FY 1982 and FY 1985.

The $480.5 million contract covered advance procurement of long-lead
items and bulk purchase parts for the F-16 airframes and ran until
October. A second contract, worth approximately $2.5 billion, would
be signed later in the year and would cover full production of the
airframes.

The four-year procurement plan was expected to total $3 billion, the
largest multi-year contract ever awarded by the Air Force, and was
expected to save the government $350 million.

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The plan did not cover the Westinghouse AN/APG-66 radar or Pratt &
Whitney FIDO engine used in the F-16. These items were to be fur-
nished to General Dynamics by the government as has been done for
those F-16s already ordered by the Air Force,

If the four-year contract proves successful in saving money, the Air
Force was expected to place an order for another 303 F-16 aircraft
under a second MYP contract that would begin in FY 1986.

This multi-year procurement contract was made possible by the 1982
Defense Authorization Bill which contained provisions extending
multi-year awards to major weapons systems.

Delivery of the 480 F-16s was to take place between June 1983 and
May 1987 at a rate of 10 aircraft per month. 231

As covered earlier in this subchapter, the inability of the U.S.
government to make this sort of multi-year commitment had caused a
certain degree of resentment in the early years of the F-16 program
on the part of the European partners when this sort of procurement
was still not legal. The USAF could make no firm production commit-
ment or binding purchase obligation until the DSARC II IB recommenda-
tion to commence full-scale production in October 1977. Even then,
in line with U.S. procurement practice the commitments could be made
only on a year-by-year basis — an initial batch of 105 aircraft for
FY 1978.

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(6) Third Country Sales

Another point of irritation in some European quarters centered on
third country sales and especially on the restrictive arms export
policy introduced by the Carter Administration shortly after it
entered office in January 1977. One incident involving this issue
attained a certain degree of visibility at the 1979 Paris Air Show.

King Hussein of Jordan had wanted to purchase the F-16 but the
Carter Administration was unwilling to permit the sale. This atti-
tude by the U.S. State Department had reportedly upset the European
members of the F-16 fighter consortium because of its impact on
their ability to recoup their F-16 investments through third-country

sales.232

Hussein visited Le Bourget and spent time examining the French
Dassault-Breguet Mirage 2000 fighter parked directly in front of the
General Dynamics chalet. During the show, according to Defense
Department officials, the king was believed to have ordered 60 of
the French fighters (in fact no such order was made).233

Another incident at the same Air Show involved Taiwan. Both Sen.
Cannon, the official U.S. representative to the Air Show and the
U.S. Ambassador to Belgium, Mrs. Anne Cox Chambers, agreed to initi-
ate action with the Carter Administration on behalf of the Taiwanese
to fly the aircraft.

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As the U.S. Ambassador to Belgium, a country with vital interest in
third-country sales of the fighter, Mrs. Chambers telephoned the
White House from Paris to speak to President Carter. She was
instead passed off to National Security Advisor Zbigniew Brzezinski,
and received little satisfaction because the White House believed
flights by Taiwan air force officers in the F- 16 "were much too

sensitive. "234

Another nation interested in procurement of 80 of the fighters was
South Korea. Two officers from the Republic of Korea's Air Force
were permitted to fly the F-16 during the Paris show "But South
Korea can't get the time of day from the Administration on the
sale," a Defense Dept, official said. "It probably means the loss
of the sale of another 80 F-16's."

A Pentagon official was quoted by Aviation Week & Space Technology
at the time as follows:

One reason the NATO F-16 fighter consortium was formed and
agreed to produce the aircraft was because of the possibility
of third-country sales. Now, they see the loss of these sales
to France and other friendly foreign nations looming and they
are upset over the obstinacy of the Carter Administration. 235

This 1979 Paris Air Show is but one example among many, but it
encapsulates a standard dilemma. Government Arms Export Controls
will continue to be an issue in all inter-allied projects due to its
significance within the overall foreign policy picture. This

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applies, whether the U.S. Government is participating or is not, as
all of the NATO member states have varying policies both amongst
themselves and over time as governments come and go. As an alliance
of sovereign social -democratic nations, this is a basic fact of life
for NATO and all its associated defense projects.

b. Multinational Consortium Status (1979-1983)

(1) Start-up

The first European assembled F-16's flew in December 1978 and the
first aircraft was delivered by SABCA in Belgium in January 1979.

At the same time European components were flowing into the United
States for incorporation into assemblies destined for both the Fort
Worth and the Dutch/Belgian assembly lines.

Interavia reported in November 1979 on an extensive briefing from
Major-General James A. Abrahamson, F-16 System Program Director and
his staff at the System Progam Office (ASD) in Dayton, on the status
of co-production, offsets and the transfer of technology. 236

By way of background, Gen. Abrahamson started out.

the F-16 program has always had a very high degree of 'concurrency',
in which a large number of events in the design, test and production
cycle take place in parallel. This introduces a high degree of
risk, particularly in developing and refining the avionics. "Con-
currency", he said, "delays the solid work that needs to be done in

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the guts of the aircraft, in the weapons system. By delaying that
you introduce a great deal of risk later on in the program. Most
people do not understand that the F-16 is the most concurrent pro-
gram we have, and as a result, when the co-production program began,
logistics planning had started for the USAF, but it was not solid.

In addition, the two production lines in Europe introduced another
element making the F-16 the highest risk program around. Most
people thought that because we had successfully flown the Air Combat
Fighter prototypes, the program was a piece of cake". 237

Much of the "solid design" work was already well underway when the
MoU was signed and it was thought that the European program could
get under way in six months, which, he stated, was "crazy ".238

The first official contract with a European company was not signed
until July 1976 and the first delivery planned from the European
companies was based on a lead time of 37 months. Gen. Abrahamson
pointed out that the Europeans did not have much to bid on. "It is
the European tradition", he said, "to work from 'good solid draw-
ings' in a 'build-to-print' program". Such drawings were not then
in existence. Nevertheless, European industry made fixed-price pro-
posals, and the program began. 239

The last producti on subcontract to be let in Europe was not signed
__ until June 1979 when NERA in Norway was awarded a contract for work
involving threat warning equipment. 240

At least for the F-16, Gen. Abrahamson pointed out that the biggest
advantage in co-production was the resultant program stability it
provided. Under the terms of the MoU, if any country made a deci-
sion resulting in a cost increase, that country would be obliged to
pay the difference. Not only did this contribute to configuration
and cost control but it also reduced options for tinkering with
funding schedules. Congress at one point expressed its intentions
to delay the co-production program after taking a close look at it,
but the cost of delaying the huge multi-national machine set up to
build the F-16 would have proved to be tremendous.

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Unfortunately, as explained by Gen. Abrahamson, the pressures to get
the program moving have resulted in (1) an imbalance in the national
offset shares, and (2) some grumbling that the program has not pro-
duced the degree of technology transfer that was anticipated.

These two issues were treated earlier in this sub-chapter.

(2) Cost Comparisons

Judging from F-16 costs up to mid-1979, a U.S. production run of 650
aircraft had a $4.7 million unit cost. By comparison, the EPG pro-
duced aircraft cost $5.3 million each. If the co-production plan
did not exist, the unit cost of the 650 aircraft for the USAF would
be $4.55 million.241

And if the Europeans had elected to buy all U.S. made F-16's, they
would have cost $4.2 million each.

This leads to the conclusion that as the result of co-production,
the four European nations were spending approximately $1.1 million
more on each aircraft, while the U.S. is, in effect, absorbing part
of the cost of co-production and paying about $150,000 more per air-
craft than it would without the European sale. Once the U.S. begins
building the second batch of 738 aircraft as planned, and whether it
is with or without co-production, these figures will clearly be very
different.

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(3) Disposal of F-104G Starfiqhters

The comencement of F- 16 deliveries to the EPG's gave rise to yet
another series of international arms deals involving the Lockheed
F-104G ' s being simultaneously phased out of service. Belgium and
the Netherlands agreed to turn over to another NATO ally, Turkey,
those F-104G' s that had been given to the two governments through
MAP funding in the early 60' s. The Federal Republic of Germany did
likewise with many of its F-1046 ' s as the MRCA Tornado entered
service.

The Belgian transactions didn't end here though. In addition to the
18 F-104G' s delivered to Turkey free of charge during the course of
1981, the Belgian government attempted to sell and then barter the
balance of 34 for spare parts to be used in newer aircraft, includ-
ing the F-16 and the Lockheed C-13Q transports.

But in 1980 the Belgian government determined that it could not
directly sell aircraft to another nation because of a national law.
The law prevented the Belgian air force from selling the F-104Gs to
Taiwan after the State Dept, had approved initiating negotiations
between the two nations.

The Belgian's then turned to barter options. The Belgian government
decided that 34 Starfighters could be traded instead of sold, espe-
cially to U.S. companies. One potential trading partner for the old

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F104GS was Lockheed Aircraft Service Co. Then, once traded, the
F-104s could be sold easily by the U.S. company to other countries
including Taiwan (which would again require U.S. government
approval).

(4) AIM-9 L Sidewinder Missile Procurement

The four EPG 1 s approached the procurement of air-to-air missiles
with which they were to arm their F-16's differently. Norway joined
up with the three MRCA Tornado nations — the FRG, Italy and the UK
— that were procuring the American short-range Raytheon/Ford Aero-
space AIM-9L Sidewinder through a joint production arrangement for
use on the other aircraft. The AIM-9L1 s are being built under
license by a multinational consortium composed of the four national
industries with the German firm Bodensee Geraetetecknik acting as
prime contractor (see Chapter 7). The other three F- 16 EPG 1 s opted
to procure their AIM-9L ' s through FMS channels off the U.S. produc-
tion line.

(5) The 1981 House Armed Services Committee Report on Program Status

In April 1981 another congressional report was released on the F- 16
program. The report stemmed from a House Armed Services subcom-
mittee visit of the EPC's in August 1980, headed up by Rep. William
L. Dickinson (R-Ala).

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Dickinson concluded that the "multinational F- 16 program has
become ... a model for future NATO standardization and interopera-
bility efforts.

In one section of the report by the subcommittee on NATO standardi-
zation, interoperability and readiness, Dickinson stated that.

While virtually all of European companies involved in the pro-
gram have experienced problems in starting up their respective
F-16 production-lines, this is not unique to the F- 16 effort.
All new production programs experience these growing pains.

The program's success to date has been truly remarkable. 245

Among the problems encountered over the prior year by the European
subcontractors were:

Bad weather in Northern Europe which forced Belgium's SABCA and
the Netherland's Fokker to delay full implementation of their
initial F-16 flight test programs. Of the days that were
available for flying, SABCA lost 55 percent due to inclement
weather while Fokker lost 34 percent.

Belgium's Fabrique National e by July 1980 had delivered 83
Pratt & Whitney FIDO engines to the USAF — 20 behind schedule.

Denmark's Dansk Industri Syndikat (DISA) encountered "severe
problems in producing the gearbox module" for the F100 engine
and fell 35 units behind schedule. Pratt & Whitney subse-
quently terminated its contract with DISA.248

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Dickinson noted that DISA, which had "acted as the Danish industry
spokesman for the F-16 program, voiced concern about the imbalance
in offsets that had developed between the Northern (Norway and
Denmark) and Southern (Belgium and the Netherlands) EPI's. While
Belgium and the Netherlands were receiving 71% and 51% offset
against the value of their respective F-16 purchases, Norway and
Denmark were only receiving 40% and 32% offset against their respec-
tive F-16 purchases. As the attainment of an evenly distributed 58%
offset is an ERG responsibility, the Northern ERG countries are con-
cerned that the EPG consortium is not doing enough to attain this
goal ."246

Dickinson stated that European participation had economically bene-
fited the USAF F-16 program. Although the "Air Froce estimates that
the additional cost to the USAF of European participation in the
F-16 program is $257,000 (in fiscal 1975 dollars) per aircraft . . .
when the direct benefits to the U.S. Government through research and
development recoupments ($325,000), indirect benefits from corporate
and personal income taxes due to additional sales ($364,000) and the
benefits to other Defense Department programs through the spread of
overhead ($99,000) are taken into consideration, a quantifiable net
gain of some $531,000 per aircraft is realized by U.S. participation
in the multinational F-16 program."

The subcommittee report noted that the purchase of the F-16 by
Denmark and Norway has been cutting deeply into the defense procure-

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ment budgets of these two countries . . . and elaborated on the pro-
gram's place within the two nations' overall defense efforts.

Denmark's purchase of 58 F-16's, for example, consumes 60% of the
country's procurement budget, "leaving only some $60 million availa-
ble for other investment programs throughout the three services."

Because Denmark's Social Democratic government has apparently
decided to limit defense spending over the next four years to a
"no-growth" level, the modernization of the country's ground-based
air defense, for instance, will be limited to the acquisition of
Hawk batteries from the U.S. "as they are replaced in the U.S. force
structure by the modern Patriot Missile System. "247

Even with the addition of the 58 F-16's as a replacement for 40
F-100 fighter bombers, the Danish Air Force is considered relatively
obsolescent, consisting as it does of 40 F-104 air defense fighters,
20 Swedish Draken fighter-bombers and 35 other reconnaissance,
transport and rescue aircraft.

Linder the Danish "no-growth" defense budget squeeze, the Danish Air
Force "would decline from 116 combat aircraft to 80", due to the
non-replacement of the F-104s when they are phased out during the
mid-1980s, "and leave the problems of ammunition shortfalls and
electronic warfare deficiencies unaddressed." Even if defense
spending is increased by 3% annually in real terms, the number of
Danish combat aircraft would total only 88 by the end of the 1980s.

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In Norway, the procurement of 72 F-16s would also consume approxi-
mately 60% of the entire Norwegian military procurement budget
between 1979 and 1983.

Under a long-term defense modernization program covering 1979-1983,
the plan's first five years heavily emphasize Air Force procurement,
although Air Force procurement money will drop off substantially in
the following years as Norway turns its attention to the moderniza-
tion of its Navy and Army.

"The predominance of the Air Force in Norway's initial 5-year mod-
ernization program reflects the compelling need to upgrade air
defense capabilities through the procurement of the F- 16 aircraft
and the U.S. Roland missile system", the report states. "Other
major Air Force procurements involve improved antiaircraft guns and
upgraded control and warning capabilities."24**

The 72 F- 16s will replace the Norwegian Air Force's current
fighter/attack fleet of 125 aircraft, "although an interim mix of
older and new aircraft may be instituted to prevent numbers from
dropping off that dramatically."

The subcommittee expressed concern, however, that "significant
uncertainties appear to exist about the ability of Norway to execute
the proposed 15 year acquisition strategy" because estimates of pro-
gram costs may be understated.249

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(6) Follow-on Orders by the EPG's

The original agreement by the four EPG's to jointly order 348 air-
craft, subsequently led to follow-on F-16 orders by several of the
EPG's, but this time acting independently.

(a) The Netherlands

In late 1980, The Netherlands was the first of the EPG's to buy
additional F-16's, adding 22 more aircraft to bring its total
F-16 buy up to 124 aircraft. The 22 were attrition aircraft to
cover the RNAF for peacetime losses. These too would be assem-
bled on the Fokker assembly line and would involve additional
orders for Dutch industry for those parts that were already
under construction in the Netherlands. This would not, how-
ever, mean additional component level work for the other three
EPI, as the original four country distribution of work was for
the 348 aircraft only, and the Netherlands was not interested
in paying the concommitant premium for its follow-on aircraft.

The Netherlands was also planning at this time to procure an
additional 71 F-16's (soon to increase to 89) with deliveries
of these to commence in 1985. Unlike the initial orders this
batch would replace the Northrop NF-5A ' s and NF-5B ' s which will
be obsolete by the mid-80's.

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In addition to the F-16's multi-role capabilities and the
advantages of commonality accompanying an all F- 16 fighter
force, the decision was naturally tied in with whether the
Fokker assembly line and other Dutch manufacturing should be
continued. There was some discussion as to the option of con-
tinuing the Dutch line or buying these fighters off the General
Dynamics line. The latter approach would reportedly have saved
the Netherlands somewhere in the area of $150 million, or
approximately $1.8 million per aircraft, and would also unfa-
vorably impact an already severe unemployment problem (with the
costs this involves). It now appears that Dutch production of
the F-16's that will replace the NF-5's is the course to be
followed.

(b) Belgium

Belgium was the second EPG country to decide upon follow-on
orders for the F- 16 involving a quantity of 44 aircraft. After
heated competition with Dassault-Breguet for the replacement of
the Belgian Air Force's older Mirage V, the Belgian Council of
Ministers pronounced itself in favor of the F- 16 at the end of
July, 1982. A definitive commitment was not expected to be
made until October, however. In the meantime, faced with very
aggressive proposal effort by Dassault, GD had been forced to
agree to very stringent conditions, especially in the area of
offset. 2^0

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GD was forced to accept Belgian demands of 58% as previously in
direct offset for the predominantly Walloon aerospace firms
that were already heavily participating in the F- 16 program.
Furthermore, GD had to agree this time to 22% in indirect off-
sets for Flemish Industry in the north (primarily

electronics) .251

Delivery of the 44 new aircraft would begin in 1988. Payment
of the $625 million would begin in 1986.

In making its decision the Belgian government once again had to
deal with the Flemish-Walloon rivalry as it had in 1975, but
with a new twist. At the time of the earlier competition the
Walloons had supported the Dassault Mirage while the Flemish
pushed for the F-16. But this time around the two groups
reversed their positions as the Walloons were by then heavily
entrenched in F-16 production, and Dassault came in offering
substantial offsets to the Flemish who received very little of
the F-16 work resulting from the first go around. 252

Not only was the definitive October commitment missed but the
linguistic-ethnic division continued to plague the project into
1983.

Belgian Council of Ministers was to meet on January 21 to
decide whether to accept General Dynamics' latest offset offer.

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Unless an agreement was reached, the Belgian economics ministry
threatened to cancel the order. 253

Even though the order had been agreed to in principle the pre-
vious summer, negotiations continued over how the offsets being
offered by General Dynamics would be distributed within Beligan
industry.

The Flemish aerospace group (FLAG) and other Flemish-speaking
groups and government ministers were demanding that all the
indirect offsets be high technology and go to Flemish firms.
General Dynamics had no problem in agreeing to this in princi-
ple. However, they wanted to retain the option to place some
of the indirect offsets in other parts of the country if
Flemish industry was not interested in the particular offsets
or not qualified to compete for the contracts. General
Dynamics also expressed concern about definitions of high

technology. 254

The very week that Pratt & Whitney announced the termination of
its one Danish subcontractor, DISA, at the end of 1980, the
Danish parliament was considering a government request for a
$250-million supplemental appropriation to the 1980 defense
budget to help overcome cost increases caused by both infla-

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mmSsmm

tion, and the change in relative value between the dollar and

the Danish kroner. 255

Much of the appropriation, which the Danish parliament debated
later in January, went to pay for the increased cost of the
F-16 fighters (only seventeen of these having been delivered to
date) .256

The total 1980 defense budget of approximately $1.22 billion
was passed by the Danish parliament in December, 1979, and was
based on the price index calculated for January, 1979. Over
the following year the country experienced an average inflation
rate of about 17% and the value of the kroner had declined
about 11% in relation to the dollar. Because of these factors,
the Danes were facing a cost increase for all their defense
purchases, and chief among them, the F-16. In dollar terms,
however, Danish defense officials pointed out that the cost of
the aircraft was still below the $6,019 million per aircraft
price agreed upon in 1975.257

(d) Weinberger* s Offer

As similar budget problems persisted in Belgium and Norway as
well, all three nations held that they wouldn't be in a posi-
tion to order additional aircraft until 1987. But the European
production lines wouldn't last that long. Europe's 40% copro-
duction share of the EPG's original 348-plane buy, and its 10%

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share of the U.S. Air Force's first 650 F-16's, were to run out
before mid-1985. Additional F-16 sales to other countries were
materializing but Europe's 15% share of such exports wasn't
enough to keep production lines operating until work on 1987
follow-on orders could begin. 258

Responding to this dilemna. Defense Secretary Caspar Weinberger
made an offer to the EPG's in October 1982 that the U.S. would
keep their firms working on the F-16 through the 1980s, at via-
ble if not advantageous rates, if the four countries would com-
mit themselves to follow-on buys totaling 209 aircraft. In
addition to the Dutch plans for 111 additional planes, this
entailed the above mentioned 44 for Belgium, plus 30 aircraft
for Norway and 24 for Denmark. 259

Specifically, the U.S. was offering front-loaded coproduction
and additional, indirect offset in an effort to keep Europe's
F-16 consortium together for the second half of the 1980s. 250

The Pentagon was willing to front-load coproduction as an
inducement to the Europeans because it figured they wouldn't
order more F-16s if the production lines were broken and costs
increased. With fewer planes in European air forces, the U.S.
would have to provide more aircraft itself or accept lower
levels for NATO. 261

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F-16 work in the Netherlands probably was secure through 1987
by virtue of Dutch follow-on orders already placed. Beyond its
original 106 planes, the Netherlands had by this time ordered
54 of the additional 111 aircraft it had commmitted to

buying. 262

Belgium, Denmark and Norway had yet to make any such commit-
ments. At the time the Dutch proceeded, the U.S. had been try-
ing to keep follow-on production under the original five-nation
memorandum of understanding. But the other countries, citing
budget problems, had said they weren't ready. For this reason,
the Dutch follow-on orders had come under a bilateral

agreement. 263

If the Europeans would commit themselves to placing these
follow-on orders by 1987, the U.S. Government was offering to
channel the appropriate amount of coproduction to their
national industries during the mid-1980s in order to avoid
broken production lines. General Dynamics and Pratt & Whitney
have agreed to this provided that they were assured of getting
in 1987 the aircraft and engine business with which the front-
loaded, mid-1980s coproduction would be associated. 264

In effect, European industry would wind up building a portion
of U.S. F-16 ' s during the mid-1980's and U.S. industry would
build the European share of European F-16 1 s at the end of the

decade. 265

Chapter 12
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FOXC/Disk 428/Ch. 12/Pg B152-B177

General Dynamics and Pratt & Whitney had reportedly sweetened
the offer further with an extension of the Belgian deal to the
others for indirect, non-F-16 offset equal to about 22% of the
procurement value of the follow-on orders. Coproduction was
being offered in terms of equivalent shipsets but was being
structured to provide the same 58% of European aircraft pro-
curement value that applied to the first 348 planes. Coproduc-
tion plus offset would equal 80% of procurement value. 268

Weinberger told the Europeans that the U.S. offer stood through
the first quarter of 1983. Belgium had been negotiating with
the U.S. and was reportedly near to closing the deal. 267

The Dutch naturally wanted assurances that they wouldn't suffer
from having moved to follow-on buys sooner than the other coun-
tries, and that their deal would turn out to be as favorable as
the others'. The 22% indirect offset, and its applicability to
the 57 planes the Dutch haven't ordered yet and the 54 they
have ordered, was said to figure in this. 268

Although Weinberger's offer was to last only through March
1983, officials speculated that it might be extended if a deal
required only a little more negotiating time. They speculated,
too, that participation by the Netherlands and Belgium, amount-
ing to nearly three quarters of the follow-on aircraft total,
might be enough to assure some sort of program regardless of
what Denmark and Norway do. 269

Chapter 12
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FOXC/Disk 428/Ch. 12/Pg B152-B177

Pratt & Whitney's agreement on front-loaded corpoduction was
said to be contingent on a minimum F100 order from the Air
Force in FY 1986, the first year the service plans competition
between the F100 and General Electric's F110 for substantial
numbers of F-16 engines. Officials said the Air Force is con-
sidering whether to require GE to include provisions for
European coproduction in proposals submitted under the engine
competition. There is not such requirement in the draft
request for proposals currently in circulation. An RFP is
scheduled for release in March. Officials said the Air Force
would try to avoid penalizing GE in its cost proposals if it
requires coproduction provisions — the Europeans would have to
finance F110 tooling, for example. 27°

Chapter 12
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FOXC/Disk 428/Ch. 12/Pg B152-B177

20. Conclusions

A. The F-104G Replacement

A comparison of the mode of industrial collaboration utilized for the F-16
project with that of the F-104G's that it is replacing can be illuminating,
vis-a-vis the evolution of NATO collaboration over the last three decades and
some of the exogenous factors conditioning it.

The F-104G 1 s were procured in a time frame when the U.S. and the FRG were col-
lectively subsidizing the defense procurement of their European allies, be it
in very different ways. This fortuitous combination was to be short lived in
that the late 50 ' s was both the tail-end of the heavy U.S. Military Assistance
Program (MAP) funding of its NATO allies procurement (1949-1961), the less
affluent Mediterranean states aside, and the front end of the FRG's rearma-
ment/reintagration into the Western Europe community (picking up after 1955
and tapering off in the late 60 1 s and early 70 1 s ) . Along with this latter
process, the FRG was willing to share the benefits of its large scale defense
effort by selecting weapon systems and entering into work sharing arrangements
that were favorably viewed, to say the least, and highly advantageous to their
NATO allies.

The selection of the USAF Lockheed F-104 Starfighter, a lightweight air-super-
iority fighter, to be the baseline for a substantially modified multirole ver-
sion of the fighter that could meet the Luftwaffe's requirements, along with
the ensuing production sharing arrangements, was a major example of this. Of
the F-104G's, 949 were built under license in Europe by a Belgian-Dutch-

Chapter 12
B-178

German-Italian industrial consortium (Mode #2 of industrial collaboration)
with the national lead firms contracting directly with their respective gov-
ernments. The four government's aircraft orders broke down as follows:
Belgium, 100 aircraft; the FRG, 700 aircraft (96 bult by Lockheed in the
U.S.); Italy, 125, and The Netherlands, 120 aircraft. Though the key to the
consortium was the FRG's large order and its desire to NATO-ize the program
through distributing the work to any of its neighbors that could be interested
in procuring the German ' G 1 variant of the F-104, the U.S. also provided major
support. Belgium and The Netherlands each received MAP credits equivalent to
25 aircraft, while Italy received 50 aircraft-worth of credits.

The U.S. alone subsized the procurement of F -104G ’ s by Norway and Denmark
through MAP. As neither country had an aerospace industry they were excluded
from the production side of the equation. (As we saw with the F-16 though,
once they were footing the full bill, their electronics and mechanical indus-
tries would enter the picture, be it a smaller proportionate share than either
Belgium or The Netherlands.)

Once the next generation system came under consideration in 1968, the FRG
decided it would team as a full partner with its allies to design and develop
a new multi-role aircraft from scratch (Mode #3 of industrial col laboration) .
By now the U.K. too had given up its unilateral approach to weapons acquisi-
tion and joined in as the other major partner in what was to become the Multi-
role Combat Aircraft (MRCA) Tornado.

Though initially successful in enlisting all three of its F-104G partners,
only Italy hung-in there. The Netherlands and Belgium could not justify

Chapter 12
B-179

assuming the extra cost and risk associated with a project that would ulti-
mately develop into a system heavily weighted toward the two medium powers
concept of what was needed.

Therefore, The Netherlands and Belgium decided to wait several more years and
see what was available on an off-the-shelf basis from other allied nations.
Though missing out on the industrial benefits participation in design and
development, through competition they could obtain a system more tailored to
their own performance and cost range, while still participating in production.
And, of course, this time around, they would have to pay the full cost and
thereby deal with the increased pressure to assuage their constituents with
the flow-back of some of the benefits resulting from these expenditures. This
led to joining up with Denmark and Norway in 1974 to increase their collective
clout through a buying government consortium that could ultimately be expanded
to include a selling consortium including their respective industries. This
time though, with the smaller scale of the project, production would be
through the medium of subcontracts from the winning nation's prime contractor,
not as licensee's fully responsible for delivery of the end item.

So much for the Mode of industrial collaboration utilized in procuring this
system. Now, as for the choice to be made vis-a-vis to Project and Contract
Management at the intergovermental level and in the area of the government-to-
industry interface. As always, for projects that are not either of the
bi-lateral licensing (Modes #1 & #4 of industrial collaboration) or bi-lateral
offset (Mode #6) the choice was between that of setting up a NATO civil
subsidiary agency outside of any national contracting framework, a NATO
Production and Logistics Organizations (NPLO), or simply grafting a multi-

Chapter 12
B-180

national organization onto that of the existing national framework of the lead
country. Because of the overwhelming role of the USAF in the program and the
decision to integrate production (i.e., European content not only in their own
fighters, but those of the USAF and third countries), the latter was the
logical solution. This can be contrasted with several other projects:

o the Boeing AWACS where the USAF and NATO projects (the latter with a
large U.S. share) were separate projects at the customer and industrial
levels (be there substantial overlap), led to the set up of an NPLO in
Brunsum, the Netherlands; and

o HELIP where the existing NATO Europe NPLO (located near Paris) excluded
the U.S., but for the Improvement Program still relied totally on the
U.S. Army Improved Hawk Technical Data Package and Raytheon's system
management and manufacturing know-how.

Like the NATO Seasparrow project involving originally the same four European
nations plus Italy, a multi-nation steering committee was set up (be it with
advisory not ultimate authority as with Seasparrow wherein it reported to CNAD
and received NATO project states) and a multi-national staff at the relevant
U.S. Procurement Command, the Air Force Systems Command (AFSC) Aeronautical
Systems Division (ASD) in Ohio. The Procurement Regulations followed were
those of U.S. DOD's ASPR, be they watered-down in certain areas, and the con-
tract administration system of AFSC Contract Maintenance Division. In the
latter case allowances were made for delegation per the usual working
relationships with governmental contractor surveillance agencies in Europe.

Chapter 12
B-181

B. Lessons Learned and Other Noteworthy Aspects of the Project

Here, I will attempt to enumerate only some of the lessons provided by the
project and scattered throughout the project history.

1 . Scheduling of Manufacturing and Subcontract Negotiations

The prime contractors had to substantially revise their initial sched-
uling of European production: both vis-a-vis manufacturing of hardware
in line with the differing industrial relations environemnt; and vis-a-
vis procurement in the area of purchase contract def init ization where the
standard terms and conditions become highly negotiable.

2. U.S. Government Responsiveness to Industrial Needs

In the latter case the U.S. contractors were highly dependent on the U.S.
Government's responsiveness both in showing flexibi 1 ty where feasible and
backing up U.S. industry where required. This involved both a rapid
sorting out and working of problems by the SPO at both the intergovern-
mental level with the four EPG's and intra-governmental level with other
components of the U.S. Government.

3. High Political and Media Visibility

These and other challenges listed below all have to be dealt with while
working within a fish bowl; i.e., these projects involving several very
sovereign allied nations are inevitably accompanied by high political and

Chapter 12
B - 182

media visibility. Not only do they find themselves at the center of a
great deal of diplomatic attention, but domestic political debate as
well. Examples include: the NATO RSI issue in the U.S.; the usual
Wal loon-Flemish squab ling in Belgium; the choice of a major subsystem
impacting standardization; the adequacy of the level of technology trans-
ferred; U.S. imposed contract terms and management systems; termination
of a supplier for convenience or default; the distribution of work
between the four ECP's.

4. Prime Contract Material Support Arrangements

Along with the NATO Seasparrow and NATO AWACS projects, this project
offers additional examples of some of the complex prime contractor mate-
rial support arrangements offered to foreign suppliers in an effort to

alleviate the extra costs accompanying their participation.

5. Cost Premium for Second-Tier Subcontracting

On the other hand the project provides us with an example of some of the
unavoidable cost premiums involved with second-tier subcontracting. A
major share of the off-setting contracts to the EPI's were passed by GD's
U.S. equipment and avionics subcontractors. The DCAS-approved mark-up or
loading factored-in at this level by each firm proved to be significantly
higher than at the prime contractor level, creating a substantial cost
bulge whenever second sourcing via U.S. suppliers is required.

Chapter 12
B-183

6. The larger scale of U.S. firms and their administrative systems tend to

make them more of bureaucratic. The scale of the U.S. defense industry
effort combined with the U.S. labor environment intensive production
techniques means that our administrative and management systems do not
flow down smoothly to smaller industries and firms in a more stable
artisan-type employee environment. The U.S. systems tend to be heavy
and bureaucratic when seen from the European view point. Though their is
room for a discerning application of these U.S. systems by and large the
foreign suppliers must learn to live with most of them, and in some cases
even improve upon their earlier way of doing things (e.g., Quality
Assurance systems). The U.S. firms themselves were also able to learn
from the interchange, such as different approaches to resolving communi-
cations and manufacturing problems.

7 . Program Management From 5,000 Miles Away

Not only the manufacture of subassemblies and components was second
sourced to Europe, but final assembly and test (as with the NATO AW ACS
and HELIP projects). This placed some very critical demands on program
management organizations of the prime contractor( s) , and the communica-
tion systems set up to support them. Those set up by General Dynamics
and Pratt & Whitney are outlined in the text.

8. Offsets

The offset element of an offer to sell major weapon systems to foreign
governments will often eclipse the other traditional elements of a pro-

Chapter 12
B-184

posal: performance, cost, and schedule. The offset battle that devel-
oped here was one of the most heated no doubt, but only a prelude to
later inter-allied engagements where the F-16 was pitted against the
Mirage F-l and later the Mirage 2000, along with the MRCA Tornado and the
naval ized derivative of the losing YF-17 prototype, the F-18. Whatever
the merits of a given system vis-a-vis cost, performance and schedule,
once the buyer's order assumes a certain critical mass in required
expenditures, offset comes into play and severely influences the final
choice. Even after source selection is made, implementation of offset
arrangements agreed to, along with their impact on the cost and schedule
commitments continues to be a major part of project management. As for
interpretation, there were some problems as in the German F-4 offset
project before it. Though through precedent it is now easier to make
offset definitions clear, it is hard to make them air tight. Of course
simplicity helps.

Small-Tiqhtly Knit Teams

As emphasized in Chapter 5 for one of the first NATO weapon system
projects, the Atlantic maritime partrol aircraft, the formation of small
tightly knit teams both within each government and between them, and
thereby having the authority to drive through and enforce a consensus, is
an imperative to successful management of inter-allied projects.

Chapter 12
3-185

10. Synchronizing Contract Award and Aqreementinq on an MOU

The final MOU was agreed to and signed some five months after the award
of the initial USAF prime contract through which it was to be imple-'
mented. Though this did cause some complications and uncertainty, they
were minimal. The broad outlines of the MOU were known in January 1975
when contract award was made and, in most cases adequate provisions were
made. This can be contrasted with the dilemma faced by another major
inter-allied project in the same timeframe, the U.S. Roland where no MOU
was originally even contemplated. One was actually signed in October
1975 nine months after the award, but there were cost increases and a
major restructuring the following Spring, followed by a relaunch of the
project.

11. Coming On-Board Late in a Sole-Source Environment

One example, however, of the problems that can arise from signature of
the MOU sliding until after prime contract award, and then the LOA's tak-
ing almost another two years to sign, involved the Reliabilty Improvement
Warranty provision. The U.S. Government was able to benefit from a com-
petitive environment and negotiated favorable terms for itself. The EPG
were not yet on board as there own source selection deadline had again
slid, and had informally expressed no interest in obtaining an option.
Once they had joined the project through the EPG's decision they wanted
the provision but as they were now in a sole-source environment, they
could only obtain the coverage at a substantially higher price than

Chapter 12
B- 186

the U.S. Air Force had paid, causing some ill will. The Europeans felt

that the USAF had not adequately represented their partners' interests.

Configuration and Funding Trade-offs

a. The concurrency of full scale development and initial production in
order to meet very tight delivery schedules made a difficult situa-
tion even more challenging. The U.S. contractors had to negotiate
fixed price contracts with the EPI and commence transfer of the
technical data packages and know-how for the start up of second
source production while still dealing with a fluid design.

Though not a unique dilemma in the defense business, all parties
concerned have to be cognizant of the difficult trade offs that
ensue and be prepared to deal with them.

b. Ultimately, though initially complicating life for all concerned,
especially at the inter-industry level, the program's multi-national
character is credited with contributing to program stability and
standardization of the design. In addition to the basic design-to-
cost structure of the program, the need to put all changes out on
the table for close cost scrutiny by the five nations (and a pro-
rata assumption of cost by those that adopted them) tended to dampen
the usual tendencies toward de-standardization.

c. Multi-national funding of the development and production in the case
of this program, the largest in which the U.S. has ever partial-

Chapter 12
B-187

pated, also contributed to funding stability in the U.S. In the MOU
each country had to make iron clad commitments to assume full
responsibility for any changes impacting the others, including the
size of orders and scheduled deliveries. Though the Europeans ordi-
narily authorize funding for projects of this scope on a multi-year
basis, in the U.S. this was not done up until the eary 80 1 s. At one
point when the U.S. Congress was seriously considering a slide in
the program, but it was forced to back off because of this provison
in the MOU.

d. When two or more armed services are involved in a joint project,
whether they be of the same nation or not, there is bound to be some
degree of de-standardization. The choice of an ECM system was the
first major break within the original five air force F -16 team when
Belgium opted for intra-service standardization over interservice.

e. The case of the selection of a new seat for the fighter on the basis
of inter-service standardization which had not been previously coor-
dinated with the four EPG (per the MOU) reminds one of the ever-
present need for vigilance in inter-agency coordination.

The DoD Fails to Standardize, but . . .

Once again the USN and USAF could not reconcile their conficting require-
ments, each choosing opposing ACF prototypes. Even so, the U.S. aero-
space industry has been able to offer a wider range of fighters in
foreign competitions. In addition to the F-X6, the F-18 has now been

Chapter 12
B-188

adopted by three other allies, two of which are NATO members, Canada and
Spain. The F -16 was not to win a NATO competition again until August of
1983 with the Turkish Air Force. With these two fighters we see that
though the U.S. services failed to standardize, limited standardization
has been achieved with allied Armed Forces. Between the two, over half
of the NATO Air Forces are now covered. There is no doubt that these
geo-strategic subgroupings within NATO will continue to color the quilt
of the NATO forces. Unlike with the F-5 and F-104 a large percentage of
our allies will now be operating fighters that also have a large place in
the U.S. inventory (more like the situation with the F-4 and especially
the F-86) . It is ironic that the winner of the 1974-75 European compe-
tition was expected to have a leg up on any foreign competitors, but that
the navalized derivative of the previously eliminated Northrop YF-17
prototype has since done so well in allied competitions. Moreover, this
is representative of the inevitable patchwork of the alliance where there
will continue to be a varying mix of inter-and intra-allied
standardization.

FMS versus Direct Commercial

The GAO report on the F-16 project released in the spring of 1979 sur-
faced a fundamental issue; selling to foreign nations through the U.S.
Government and its Foreign Military Sales (FMS) system versus the prime
contractor entering into direct contractual relations with the foreign
governments on a direct commercial basis. First there are the usual
trade-offs: (1) Direct Commercial offers advantages vis-a-vis timelines
and understanding, no FMS Administrative fee, a less detailed specifica-

Chapter 12
B-189

tion and documentation, greater payment flexibility; (2) through FMS a
foreign customer can benefit from the greater buying leverage of U.S.
Government due to its large order base, technical and business management
expertise offered by U.S. Government, and a more active sponsor in
obtaining waivers on R&D recoupment and asset use charges, or receiving
FMS credits (though not a prerequisite) .

Though this is not necessarily an either-or choice (a given sale often
being a mix of the two), in those cases where substantial sub-contracting
with the foreign customer's industry enters the picture as the GAO report
emphasizes, increased consideration should be given to the direct com-
mercial approach. This would avoid the cumbersome process of obtaining
waivers to the flow-down of DAR.

15. U.S. Shows Flexibility on Funding Terms

Even though the inter-governmental negotiation leading up to the four
LOA's took much longer than expected, the U.S. Government in the end was
able to show substantial flexibility, vis-a-vis payment schedules; waiv-
ing of the normal FMS cash advances required to cover terminations
(though this presented other problems); deferred payment of R&D costs;
and the U.S. Treasury's agreement to accept advanced payments.-

16. Third Country Sales

The buying and making of weapon systems is a highly potent political
issue no matter what countries are involved. Naturally, who these sys-

Chapter 12
B-190

terns are sold to is subset of this very complex and volatile set of
issues. Among the soverign NATO allies this issue presents an inevitable
dilemma for joint projects. This is true whether the U.S. is involved or
not. With a wide variance from nation-to-nation, and as governing admin-
istrations come and go, this will continue to be a controversial issue.

17. Models for Other Projects

In setting up this project a number of useful mechanisms were developed
by the U.S. Government that might be considered as models for future
projects: Capital Investment Incentives for contractors, the establish-
ment of a Currency Clearing House to handle the multiple foreign exchange
transactions; and revised patent infringement liability.

18. GAO Audit and Applicability of CAS

Another example of lack of prior inter-agency coordination involved the
initial DOD waiver of Examination of Records by the Comptroller General
and Cost Accounting Standards, whereas only the Cost Accounting Standards
Board and the GAO had this authority. Once corrected and the requirement
to flow down the clauses was reinstated in both contracts an impasse
existed for several months.

Ultimately jont audit compromise arrangements were worked out in early
1976. At a meeting of the steering committee's Price and Audit Subcom-
mittee in November 1975, the EPG's and EPI's agreed to accept application

Chapter 12
B-191

of the CAS Standards then in effect (CAS 401-407). Such was not the case
for new standards later enacted (CAS 408-415).

19. AQAP

Use of NATO's Allied Quality Assurance Publications (AQAP) went smoothly,
though they needed to be supplemented in subcontracts with the EPI's with
additional requirements for: non-conforming materials control; lower-
tier subcontract controls; and configuration management/engineering
change control.

20. Follow-On Orders

The orginal 348 aircraft order of the EPI was just the beginning,
enhancements and follow-on orders have since entered the picture along
with the usual standardization and offset trade-offs.

21. Timely Congressional Review

In April 1975 Congress was notified of a pending foreign sale but not the
conditions of it contained within the MOU. Since Congressional perroga-
tives were significantly restricted once the sale was approved and the
MOU signed, especialy because co-production was involved, the 1979 GAO
report recommended that the MOU as well be submitted for review by
Congress as soon as possible.

Chapter 12
B-192

22. European Depot Level Maintenance Support for USAF F-16's

It is necessary to be aware of the constant danger of getting trapped in
"the chicken or the egg" scenario such as occurred with the planning for
a joint depot level maintenance and repair program. The USAF couldn't
commit itself to using EPG depots until they were established and funded,
while EPG's couldn't make the investment until the USAF committed to use
them. Some of the problems faced in breaking out of this impasse were:
EPI facilities were to be fully engaged in production through 1985 and
had little capacity to accept repair work from USAF F-16's deployed in
Europe in the interim; and the U.S. limiting of repair contacts to one
year.

23. The European Program Group

In the aftermath of the loss of the four-nation fighter competition in
mid-1975, France realized that its dual status within NATO had hindered
its sales efforts with its allies, in spite of appeals for European soli-
darity and the need for greater intra-European cooperation. Conse-
quently, later that year France elected to join with its other European
NATO allies, but outside of NATO, in forming the Independent European
Program Group (IEPG). The collective objective to be pursued was to pro-
mote greater armaments collaboration amongst the European members of the
A1 1 iance.

Chapter 12
8-193

See Chapter 7 for this program history.

2 German Defense officials evidently followed the European fighter evalua-
tion closely, primarily through contacts with their Dutch counterparts,
and there was talk within the four nation consortium of seeking German
partipation, but nothing ever came of it.

3 F-16 Lessons Learned Study, Defense Systems Management College, Fort
Belvoir, Virginia, 22060, June, 1978, Enclosure (2) , p. 4.

4 DSMC Study, op. cit. , Enclosure 4, p. 20.

5 Ibid., p. 21.

6 Ibid., p. 23.

7 Ibid., p. 21.

8 Ibid., p. 22.

9 "U.S. had to Reestablish Offset Credibi lity," Aviation Week & Space Tech-
nology, May 2, 1977, p. 75.

10 Ibid.

11 Ibid.

12 Ibid.

13 Ibid.

14 Ibid.

15 Ibid.

16 Ibid.

17 See Chapter 5

18 See Chapter 7

19 See Chapter 5.

20 See Chapter 11.

21 SNECMA is a primarily state owned firm, Chief among SNECMA' s minority

share-holders is Pratt & Whitney, SNECMA1 s competitor in the contest with
its F100 engine in the F-16.

22 Robert R. Ropelewski , “FIE Buy Urged for European Unity," Aviation Week &
Space Technology, p. 21, 1975.

23 Ibid.

Chapter 12
194

Ibid.

Ibid., p. 20.

Ibid., p. 21.

Ropelewski, op. cit., p. 21.

Ibid.

"The Saab JA37 Viggen in flight test; the 37E in the European contest,"
Interavia, 2/1975, p. 187.

Ibid.

The Anglo-French Jaguar had also been heavily marketed by British Air-
craft (BAG) to Belgium alone back in December 1973 - January 1974, but
dropped out of the picture in February when the 4-nation purchasing con-
sortium was set up.

Interavia Air Letter, No. 7982, April 8, 1974.

Formerly known as Fairey, (as it was part of the British manufacturing
group of the same name) the firm changed hands in the late 70 's and is
now named SONACA (Societe National e de Construction Aerospatiale).

Interavia Air Letter, No. 7993, April 25, 1974.

Interavia Air Letter, No. 7984, April 10, 1974.

"The Saab JA37 Viggen in flight test . . op. cit.

Robert R. Ropelewski, "Saab Revises Indirect Offsets in Latest Fighter
Sale Bid," Aviation Week & Space Technology, March 31, 1975, p. 20.

Ibid.

"U.S. had to Reestablish Offset Credibi li ty," op. cit.

DSMC Study, op. cit., Enclosure (4), pp. 1-2.

Ibid., Enclosure (4), pp. 29-32.

Chapter 12
195

47 GO participates in Sub-Committees, but not in the Steering Committee.

48 "F-16 Advisory Unit." Aviation Week & Space Technology, May 2, 1977,

p. 63.

49 Edward H. Kolcum, "Fighter Effort Tests Collaboration Concepts," Avi ation
Week & Space Technology, May 2, 1977, p. 45.

50 As quoted in DSMC Study, Enclosure (5), p. 11.

51 James A. Abrahamson, Brigadier General, USAF, Defense Systems Management
Review, Vol. 1 No. 3, Summer 1977, "P-16-NAT0' s Military and Economic
Cornerstone.", p. 21

52 Now called the Defense Acquisition Regulations (DAR)

53 Abrahamson, op. cit. , p. 22.

54 "U.S. had to Reestablish Offset Credibility," op. cit.

55 DSMC Study, op. cit.. Enclosure (4), p. 40.

56 Ibid.

57 Ibid.

58 Ibid., pp. 41-42.

59 Ibid., p. 42.

60 Ibid., pp. 43-44. (Specialty metals account for a very high percentage
of the F-100 engine and a small percentage of the airframe.)

61 DSMC Study, Enclosure (5), op. cit., pp. 12-13.

62 Ibid., p. 13.

63 Ibid., pp. 14-15.

64 Ibid., p. 15.

65 DSMC Study, op. cit.. Enclosure (4) pp. 33.

Ibid.,

P-

36.

Ibid. ,

46.

Ibid.,

. 33-4.

Ibid. ,

34.

70 Since 3rd country sales were non-existent at this time 15%* OX s 0. 41

Chapter 12
196

DSMC Study, op. cit., Enclosure (4), pp. 34-5.
Ibid., pp. 35-6.

Offset options are naturally further constrained by the fact that signif-
icant portions of these elements are not candidates for contractor pro-
vided co-production, i.e. Standard Ground Support Equipment, Government
Furnished Equipment (common to numerous USAF aircraft) together with the
support of these elements; and, of course, the non-recurring costs.

DSMC Study op. cit.. Enclosure (4) p. 34.

DSMC Study op. cit. Enclosure (5) pp. 26-29.

Ibid., pp. 8-10.

DSMC Study, Enclosure (5), p.3.

DSMC Study, Enclosure (3), p. 8.

Kolcum, Edward H. , "Fighter Effort Tests Collaboration Concepts" Avi a-
tion Week and Space Technology, May 2, 1977, p. 50.

DSMC Study, Enclosure (3), p. 8.

Ibid.

Ibi-d.

Kolcum, op. cit, p. 57.

Abrahamson, op. cit, pp. 22-3.

DSMC Study, op. cit. Enclosure (3), p. 9.

'Belgium selects F -16 ECM System,' Aviation Week and Space Technology,
August 6, 1979, p. 16.

Ibid.

'Concensus Sought on F -16 Electronic Jamming System', Aerospace Daily,
September 27, 1979, p. 123

Ibid.

"Dutch Air Force in Acceptance of Pentagon's ALQ-131", Aerospace Daily,
November 12, 1980, p. 48

Chapter 12
197

Ibid.

95 Ibid.

96 Ibid.

97 Ibid.

98 Ibid.

99 Ibid.

100 Ibid, p. 49

101 "British to Use Internal ECM Systems", Aviation Week & Space Technology,

January 26, 1981, p. 74 ~~ ’ - -

102 AFLC-AFSC memorandum of agreement, quoted from DSMC Study, Enclosure 5,
pp. 45-6.

103 DSMC Study, op. ci t. , Enclosure 5, p. 46.

104 Ibid.

105 Ibid.

106 Ibid., p. 49.

107 Ibid., pp. 49-50.

108 DoD Report to Congress on Rationalization/Standardization within NATO,

January, 1980.

109 Burchfield, op. cit. p. 3, Burchfield also recommended that STANAG 4107
be fully implemented.

110 Louis Kraar, "General Dynamics Struggles to Build a Plane for All
Nations", Fortune, March, 1977, p. 186.

111 Memorandum for John W. Boddie Air Force member of DoD Contract Finance
Committee, Col. Charles Elliott, Chairman. June 14, 1976, as quoted in
DSMC Study, Enclosure (5), p. 21.

112 DSMC Study, Enclosure (5), pp. 21-22.

113 Ibid., p. 37.

114 Ibid., pp. 38-39.

115 Ibid., Enclosure (5), pp. 19-20

116 Ibid., p. 16

Chapter 12
198

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

Ropelewski, op, cit., pp. 65-6.

DSMC, op. cit.. Enclosure (4), pp. 46-7.

Ibid., p. 47.

Ibid., Enclosure (6), pp. 20-21.

Not only were estimates of cost by some of the bidders complicated by a
lack of experience with RIW and new designs, but the possibility of
European co-production further increased the risks. The suppliers could
have to make and perform overhaul on units built in Europe.

DSMC Study, Enclosure (5), p. 22.

Ibid., pp. 23-4.

Ibid., p. 16.

Burchfield, op. cit., p. 5.

Robert R. Ropelewski , "Five-Nation Coproduction Under Way," Aviation Week
& Space Technology, May 2, 1977, p. 66.

"Broad Logistics Support Plan Evolves", Aviation Week & Space Technology,
May 2, 1977, p. 114 (hereafter referred to as "Support Plan").

Ibid.

Conversation in July 1980 with Lt. Col. Kehl, Director of the Multi-
national Office at the F-16 SPO.

Ropelewski, op. cit., p. 66.

"Support Plan", op. cit., p. 114.

Kehl , op. cit.

"Support Plan", op. cit., p. 115.

Kehl, op. cit.

"Need for West's Fighters Put at 6,000", Aviation Week & Space Technol-
ogy, May 2, 1977, p. 73.

DSMC, op, cit.. Enclosure (7), pp. 1-5, Ibid., p. 6 (June, 1978).

Ibid., p. 5.

Ibid., p. 6.

Kehl, op. cit.

Chapter 12
199

140

141

142

143

144

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

160

161

"GAO Cites Intermediate, Depot Maintenance Concerns for F-16", Aerospace
Dai l.y, August 21, 1980, p. 291.

Ibid.

Kolcum, op. cit. , p. 50.

Kolcum, op. cit., p. 49.

Kraar, op. cit., p. 186.

Kraar, op. cit., p. 184.

Abrahamson, op. cit.

"Europeans Ready Production Tooling, Aviation Week & Space Technology",
May 2, 1977, p. 101.

Kraar, op. cit., p. 184.

Ibid., p. 186.

Aviation Week and Space Technology, "International Management Team Sets
Quick Response Time Goal", May 2, 1977, p. 93.

The number of GD personnel at these resident offices turned out to be
less than originally thought. GD found that it was better to maintain a
small liaison force, while depending more on the use of a telex system
for solving problems. As of mid-1978 the number of these representatives
totaled 6.

Ibid.

Bulban, Erwin J., "Studies Pinpoint Cost-Saving F -16 Manufacturing Tech-
niques". Aviation Week & Space Technology, May 2, 1977, p. 87.

Ibid.

Kolcum, op. cit., p. 50.

Burchfield, op. cit., p. 7-8.

Brown, David A., "Pilot Display Program Set", Aviation Week & Space Tech-
nology, May 2, 1977, p. 129. —

Chapter 12
200

162

163

164

165

166

167

168

169

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

185

J. Philip Geddes, "F-16 Coproduction: An Americann Point of View",
Interavia, November 1979, p. 1091.

Ibid.

Ibid., pp. 10-91-2.

Kraar, op. cit. , p. 188.

Ibid.

as of April 1977.

S735M for the 4EPG's 348 F-16 ' s and $101M for the USAF * s 650 F-16 1 s.

Spare modules are stocked, and instead of shipping and entire engine to
the depot for repairs, only those modules needing repair are sent.

Geddes, op. cit.

Ibid.

Warren C. Wetmore, "F-16 Engine Partnership Plans Nearing Completion,"
Aviation Week & Space Technology, May 2, 1977, p. 115.

Ibid.

Ibid., p. 117.

European's Ready Production Tooling, Aviation Week & Space Technology,
May 2, 1977, p. 99.

Geddes, op. cit.

Ibid.

Wetmore, op. cit., p. 117.

Ibid.

Chapter 12
201

186 "P&W Attempts to Keep F -16 Engine Subcontracting Work in Denmark, Aero-
space Daily, January 4, 1981.

187 Ibid.

188 Ibid.

189 "F-16 Engine Contract Terminated", Aviation Week & Space Technology,
January 12, 1981, p. 21.

190 Ibid.

191 Ibid.

192 Ibid.

193 "P&W Attempts to Keep F-16 Engine Subcontracting Work in Denmark, Aero-
space Daily, January 4, 1981.

194 Ibid.

195 "Fabrique Nationale Experiences F100 Engine Production Delays", Aerospace
Dai ly, April 22, 1981, 300.

196 Ibid.

197 The EPI follow a 230-235 man days/year versus 250-255 in the U.S.

198 Burchfield, op.cit. , p. 8.

199 Fabrique National (FN) is one of the few exceptions to this one-shift
characteristic among the European subcontractors. FN works a two-shift
day. As a result, there was little difference between the original Pratt
and Whitney estimate of duplicate tooling and most of FN's tooling costs
are therefore covered in its contract with Pratt and Whitney.

200

Kraar, op.cit., p. 188.

201

Kraar, op.cit., p. 188.

202

Burchfield, op.cit., p. 1.

203

Burchfield, op. cit. , p. 5.

204

Based on figures offered in Ropelewski , Robert R.
Technology, "Five-Nation Coproduction Under Way,"

, Aviation Week & Space

May 2, 1977, p. 59,

205

Ropelewski , Robert R. , "Five-Nation Coproduction
Week and Space Technology, May 2, 1977, p. 65.

Under Way," Aviation

206

Ibid.

207

Ibid.

Chapter 12
202

208

209

210

211

212

213

214

215

216

217

218

219

220

221

222

223

224

225

226

227

228

229

Ibid.

Kehl , op. cit.

Ibid.

Telephone interviews with General Dynamic's Blaine Scheideman, V.P. and
Director of the F-16 Program, and Norman Day, F-16 Director of Materiel,
April 1981.

Ibid.

Kraar, op. cit., p. 186.

Aviation Week & Space Technology, September 18, 1978.

Aviation Week & Space Technology, October 18, 1978 p. 18.

Comptroller General of the U.S., A New Approach is needed for Weapon Sys-
tems Coproduction Programs Between the United States and its Allies, GAU,
April 12, 1979, p. 20. (hereinafter referred to as GAO 4/79) Arrangemen t

A2 is covered in greater detail in Chapter 3 under the NATO AWACS
program.

Ibid p. 10.

Ibid p. 20.

Ibid p. 12.

Ibid p. 13.

Ibid, pp. 16-17.

Ibid, p. 17.

Ibid, p. 18.

Aircraft Forecast, 'General Dynamics F-16 Falcon', July 1982.

Defense Industry Report, March 20, 1978, p. 124.

"AF Plans no F-16 Design Changes, Congress Told", Aerospace Daily, June
22, 1978, p. 278.

"Europeans sign F-16 Contracts", Aviation Week & Space Technology, May 9,
1977.

Chapter 12
203

230 "F-16, F-14, F— 15 Procurement Plans Soar", Aerospace Dai ly, February 10,

1982, p. 217.

231 "Air Force Awards First of Two MYP Contracts for F-16", Aerospace Daily,

January 27, 1982, p. 132.

232 "U.S. Policies Thwarting Third-Country F-16 Sales", Aviation Week & Space
Technology, June 25, 1979, p. 25.

233 Ibid.

234 Ibid.

235 Ibid.

236 J. Philip Geddes, "F-16 Coproduction: An Merican Viewpoint", Interavi a,

November 1979, pp. 1090.

237 Ibid.

238 Ibid.

239 Ibid.

240 Ibid.

241 Ibid., p. 1091 m

242 "Belgium to Barter F-104G' s" , Aviation Week & Space Technology, March 16,

1981, p. 18.

243 Ibid.

244 Ibid.

245 "Rep. Dickenson Praises Multinational F-16 Program", Aerospace Daily,

April 17, 1981, p. 275.

246 Ibid.

247 Ibid.

248 Ibid., pp. 275-6.

249 ibid.

250 Pierre De Vos, "La Belgique Doit Confirmer en Octobre son Choix en Faveur
du F-16 American", Le Monde, j u i 11 e t 1982, p. 22.

251 Ibid.

252 "Belgian Linguistic Divisions Threaten F-16 Order", Aviation Week & Space

Technology, January 24, 1983, p. 22. 9

Chapter 12
204

253

254

255

256

257

258

259

260

261

262

263

264

265

266

267

268

269

270

Ibid.

"Danes Ask Supplemental to Pay for F-16's", Aviation Week & Space Tech-
nology, January 5, 1981, p. 18. ~""~~

Ibid.

"U.S. Offers Europeans Up-Front F-16 Coproduction, Offset", Aerospace
Dai ly, January 21, 1983, p. 113.

Ibid.

Ibid., p. 114.

Ibid., p. 113.

Ibid.

Ibid., p. 114.

Ibid.

Chapter 12
205

NATO AWACS

The project history on the NATO AWACS program has been
withdrawn for revision. (See the Table of Contents plus
the following charts for an idea of the prior 140 page version
and where we left off.)

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NATO AW ACS Program (Part 1)

1970-1975

NATO AWACS Program (Part 2)

1975 -1980

CHAPTER 13

MULTI -SYSTEM PACKAGE DEALS (MODE #8)

As was previously shown, in case of the U.S. MWDP funded NATO Lightweight Strike
Reconnaissance (LWSR) fighter competition between 1955 and 1957, competitive
common selection among prototypes of the selecting nations was unworkable
amongst sovereign nations. Nations became so closely identified with their own
prototypes that the final choice was ignored by the losing nations. As shown by
the Atlantic, joint selection among competing designs instead of prototypes,
couldn't do the trick either, involving no binding commitment of the losing
nations to abide by the final choice in following it up with orders. In the case
of NBMR3, over a major system, we saw that joint agreement on a final choice of
design couldn't even be reached.

Where competitive common selection has succeeded for a multinational grouping of
nations,~~it has involved very specific cases from which all the projects in Mode
#7 emanated, and which all led to multinational offset agreements within U.S. lea
industrial teams. In the previous cases of the NATO LWSR fighter, the Atlantic,
or NBMR 3, and the Franco-German tank project there had been no possibility of
one body with sufficient authority arbitrating among the competing systems. This
has been successful only where one participating nation had systems that could
adequately fill the requirement, as occurred when the USAF intervened in selec-
tion of the Boeing E-3A over the Grumman E-2C by NATO for its Airborne Early
Warning Program. Another case of joint cotrmon selection that worked was that
between the Viggen, Mirage FI, and the U.S. winner of the YF-16/YF-17 competition
by a consortium consisting of Belgium, Denmark, the Netherlands, and Norway in

Chapter 13
1

the mid-1970's leading to joint production of the F-16. But here none of the
selecting nations had their own national competing systems among the contest-
ants. Yet other cases involved projects commonly funded by the NATO Infrastruc-
ture Program where the competing consortia each represented firms of all the
major NATO nations such as NADGE (won by a Hughes led consortium in 1966) or
SATCOM III Ground Stations (won by a Ford Aerospace led consortium in 1978).

The NATO LWSR project of the mid-50's followed by the joint Franco-German tank
development project of the late 50 ' s and early 60 1 s collectively served to teach
the NATO allies an important lesson - competitive common selection from among
prototypes of the choosing nations was not politically feasible. Even when
competition was reduced to the design stage, as exemplified in the Atlantic and
NBMR 3 projects, it couldn't work, at least on an alliance-wide basis. Both of
these were preceded as well by unsuccessful attempts to coordinate all armaments
development and production within the alliance.

As things worked out, this issue was circumvented by the joint design/development
and/or proauction arrangements seen in Modes #1-7. But the need still remains
for a more rational form of collaboration in the development and production of
weapon systems, one that allows for trade offs in work distribution on the basis
of 'juste retour' to occur more rationally than within the framework of a single
proj ect.

This compromise between the extremes of the project by project approach that
worked, but was costly, and the earlier attempts at alliance-wide solutions was
found in an off-shoot of Mode #3 (European joint development and production).

Chapter 13
2

This was the Anglo-French fighter package of 1965 and their helicopter package of
1967. A similar concept was developed in 1977 by the DOD, the "Family of
Weapons" concept. This package deal /family of weapons approach offers the possi-
bility of including many of the best elements of the other seven Modes, while
eliminating many of their disadvantages. It also offers a feasible mechanism for
bridging the gap between the U.S. governments 'interdependent' development po 1 -
icy1 and the 'joint' development approach followed by Europe's three medium
powers, France, the FRG and the UK (at least in those cases when unilateral
development is not feasible).

Interdependent R&D involves the unilateral funding and carrying out of a project
within one nation, with tne end product being available to all partners to the
agreement for license production. For technological, military, and political
reasons this is generally not acceptable to the Europeans.

Chapter 13
3

A. THE AFVG AND JAGUAR FIGHTER PACKAGE

In the wake of the cancellations and reorientation of the British government's
aerospace policy in late 1964 and early 1965, on May 17, 1965 the British
Ministers of Defense and Aviation and the French Ministers of Defense and
Transport/Public Works signed an MOU covering the joint development and produc-
tion of a variable geometry fighter for the late 1970's and a conventional-wing
strike fighter/trainer. Each government committed $56 million to a design and
production pool for the over-all program. Both governments were leaving the door
open for other nations to participate; planning to inform other governments at

appropriate times of the two projects needs and, if suitable inviting them to
2

cooperate. Anglo-French Projects Group was established at the intergovern-
mental level to oversee the two projects, each with its own Management Committee,
and to later include other projects as added. The Anglo-French Martel air-
to-ground missile project which had been launched the previous fall was the
only other project to come within the Anglo-French Projects Group at this time.

Design work on both projects was started on the basis of a joint document out-
lining the French and British approaches to the operational requirements. The
Anglo-French variable geometry (AFVG) fighter involved the collaboration of
British Aircraft Corp. (BAC) and Dassault on development of the airframe and
Bristol Siddeley and Snecma on the engine. The development of the strike
f ighter/trainer was to be based on the Breguet 121, and was named Jaguar. For
the Jaguar the airframe partners were Breguet and, once again, BAC while
Turbomeca and Rolls-Royce would collaborate on the development of the turbo
fans for the two-engine aircraft.

Coleman, Herbert J. Coleman, "U.K., France Sign Aircraft, Engine Pact," Avia-
tion Week & Space Technology, May 24, 1965, p. 18.

Chapter 13
4

attached. n° 358 - Air Actu Fevrier 83

Photo by courtesy of

BAC

As part of the same MOU both governments also agreed to a joint design study for
an airbus concept, a joint evaluation on an early warning aircraft requi rement ,
and specifications for a heavy helicopter.

The British and French governments were convinced that there would be a wide
variety of uses for the variable sweep aircraft. Defense Minister Healey was
quoted descsribing the project as "the core of our aircraft program". This
aircraft for the British would replace the English Electric Lightning, and the
Hawker Siddeley Buccaneer (both then in service), as well as the McDonnell F-4
Phantom recently ordered for the RAF from the U.S. The British requirement was
for about 200 airplanes, against 150 for the French.

Unlike the Concorde supersonic transport project dating from 1962, the MOU con-
tained a cancellation clause. Either nation could withdraw from either project,
without financial penalty, by giving 12 months notice. However, until June 1,
1967 the planned date for a commitment of funds for full production, either side
could withdraw from the variable-geometry aircraft without giving 12 months
notice. The withdrawing government could be required, however, if the other
government so desired to complete its work on the engine within agreed financial
limits. Nevertheless, as was pointed out by Healey at the time, "We should not
have entered into these agreements if we thought it likely that later we would
withdraw" .3 * 5

3I bid .

Chapter 13

For the Jaguar strike f ighter/trai ner both governments would commit enough funds
to enable the prototype stage of aircraft engine to be completed, with the
intention of both governments being to then proceed to full production. The
joint order for the Jaguar was expected at that time to be in the neighborhood of
a total of 300 aircraft.

1. The AFVG Project

Within less than two months of the date of signing the MOU the fighter package
was being threatened from within. Agitation had started behind the scenes to
drop the Jaguar project all together from the package so as to be able to
concentrate resources on the more advanced vari abl e-geometry aircraft. This
idea was being promoted by a small but powerful i ndustry-government faction in
both countries (the industrial part of which was those firms having nothing to do
with Jaguar).

The move to drop the Breguet/BAC Jaguar had started in France in support of the
argument that Dassault's sweep-wing design could be operational by 1971 using the
Bristol Siddeley/Snecma Mars M-45G engine. The main complaint was that the work
on the Jaguar project would tie up technical teams and production space that
could be better used on the more spohisticated design for a vari able-geometry
fighter based on the design then underway at Dassault. Bristol Siddeley was
particularly anxious to spur development of the Mars engine family because of its
potential cross-feed into the civil market in view of the current talks between
the engine manufacturer and Lockheed and North American on short-to-medi urn range

4~~ : — —

"Move to Drop Brequet 121 Started," Aviation Week & Space Technology, July 19,
1965, p. 24.

Chapter 13
6

jet transport projects. In any case, this attempt to dump the Jaguar failed and
the two fighter projects continued in tandem.

By October 1965, BAG and Dassault had reportedly produced a joint design for the
variable-geometry fighter that was considered fairly definitive. The emphasis
then turned toward completion of engine specifications by the Joint Engines
Subcommittee of the Anglo-French Management Committee.

Over the following year, however, the projects prospects were reversed as the
French resistance to rising research and development costs stiffened. The joint
specifications effort was faced with the difficulty of reconciling the two ver-
sions required by the two nations. The British wanted a long-range strike
aircraft and the French, an interceptor with the capability of supersonic speeds
at high altitudes.

By October 1966, the vari abl e-geometry fighter was considered near cancellation
by both governments. Both BAG and Dassault were preparing to resubmit their
design in an attempt to cut costs. The crucial decision on development of the
AFVG, then in an advanced stage of design was to be decided at a Defense Minis-
ters in November, 1966, but was delayed unti 1 December. The French delegates
indicating a necessity for a hard look at French defense budgeting into the early
1970's, while the British were pressing to go ahead. The Ministers ordered BAG
and Dassault the complete specifications of the airframe and engines before the
December meeting, while financing discussions continued at a political level.

"Vari able-Geometry Fighter Decision Set for December," Aviation Week & Space
Technology, November 14, 1966, p. 32.

Chapter 13
7

Although the two nations' requirements were different technically, the British
felt that there was no insuperable obstacle to harmonizing the requi rements .

The planning at that time envisaged the two nations sharing jointly in an esti-
mated R&D cost of about $560 million. As a result of France's concentration on
building up her nuclear forces, however, particularly the submarine segment,
there was a shortage of funds for conventional armaments. This expenditure was
the crux of the problem for the AFVG.

Healey was committed by the decision made the previous year, when he told the
House of Conmons that the AFVG fighter would be the operational and industrial
core of British air strike power in the 1970's. In order to lessen the French
resistance to the program, the British were offering th carry more of the finan-
cial load, preparing to take the first 50 airplanes off the joint production line

in 1972. The French would not begin to take theirs until 1974, thus reducing the

“ fi

pressure on the French budget.

In December, however, once again no decision was reached, while the chances for
any formal or definitive action on the AFVG, in the near future, dirnned. Indus-
try fears that France was about to pull out of the AFVG program grew as British
Aviation Minister Mulley stated “we are well advanced in contingency planning'1.* * * 7 8

When the two Defense Ministers met again in April 1967, as the production-
commitment deadline of June 1 neared, they decided to postpone the production-
commitment by 18 months, until January 1969. The development of the design was

™ - -

"UK-French Effort Seen in Doldrums," Aviation Week & Space Technology, December

12, f 1966, p. 33.

7 Ibi d .

Chapter 13

to continue on schedule with the aircraft still being planned for 1974 service.

At the same time, the two governments formally asked the FRG to participate in
the program, either through outright purchase, or preferably entering the con-
sortium on a work-sharing basis. A German decision was not expected until mid-
summer.8

Several months later, in late June, the joint vari able-geometry aircraft project

finally collapsed. The French government formally withdrew, notifying the

British government that it would not be able to meet its financial commitments in

the AFVG program, while the British decided to proceed with a project definition

study of its own version of the AFVG. Evidently, even though the two govern-
ments had been able to reach full agreement on both operational and production
requirements, the French Government decided - barring a complete change of time-
table and operatinal requirements - to withdraw from the program."^8

Defense Minister Healey quickly clarified its position on the issue of the impact
of the French decision on other Anglo-French joint military projects, saying that
(i.e., with regards to the Jaguar and more recently, the Westland-Sud helicopter
projects) there would be no repercussions.

With Britian left high and dry, the opposition Conservative proceeded to exploit
the issue. The shadow defense minister attacked Defense Minister Healey and
called for a full debate on "the wreckage of the government's defense policy".

"Anglo-French Fighter Decision Postponed," Aviation Week & S^pace Technology,

April 24, 1967, p. 26.

"French Drop AFVG; U.K. Continues Effort," Aviation Week & Space Technology,
July 10, 1967, p. 32.

^"AFVG ABandonment ," Aviation Week & Space Technology, July 3, 1967.

Chapter 13
9

He claimed that Healey could not "disavow res pons ibi 1 ity for having made up an
airplane that will not come into existance, a gamble that did not pay off" . 11

As for British industry, in addition to the anxiety caused by the collapse of its

major military aircraft project for the following decade, the unbalanced nature

of the Anglo-French joint project packages (the remaining half of the Anglo-

French fighter package and the recently established Westland-Sud helicopter

package) was glaringly evident. Of these four remaining projects, French

industry was in the position of design leadership in three. The cancellation
also left no immediate military use for the Bristol Siddeley/SNECMA M-45 powerplant,
which was under development for the AFVG (the M-45 was later selected to power
the ill-fated VFW 614 transport).

The possible implications of this vis-a-vis the maintenance of the technological
strength of the British aerospace industry and of a concommitant freedom of
action for future joint projects was readily appreciated.

The French, who had continued to fund their simpler Mirage 3G variable-geometry
fighter (an aircraft at a more advanced stage development) in parallel with the
AFVG program, as a back up alternative, continued for several more years with the
funding of the development of its Dassault var i abl e-geometry aircraft
(redesignated the Mirage G6, and then later in a scaled down version, as the
Mirage G8). This separate R&D program, however, finally reached a dead end in
the early 70' s, never having been ordered into production.

^"French Drop AFVG...," op. cit.

Herbert J. Coleman, "U.K. Stressing Collaborative Efforts," Avi ation Week &
Space Technology, September 7, 1970, p. 14.

Chapter 13
10 •

For their part, the British government had been considering the alternatives of:
an all British variable-geometry study; increasing its order for 50 General
Dynamics F -111 variable sweep aircraft by as much as another 100; joining the
U.S.-FRG/STOL fighter program, or the possibility of col laborati on on a vari-
able-geometry program with other countries. The latter alternative was the one
finally taken in the following year and resulted in the Anglo-German-Itali an MRCA
program.

2. Jaguar

(A) Establishment of the Program

The Jaguar tactical strike and advanced trainer aircraft is the result of the
independent requi rements of the Armee de l'Air and the RAF. For France, the
Jaguar concept dates from 1964 when the French Air Staff was interested in a new
light multi-purpose aircraft which could serve in both tactical support and
advanced trainer roles and would be a link between the Magister and the Mirage
III and which could replace the F-84, T-33, F-100 and Mystere IV. Breguet
Aviation won the subsequent technical competition among French airframe con-
structors with its BR.121 for the requirement known as the E.C.A.T. (Ecole do
Combat et d'Appui Tactique).

The engine chosen was a joint submission by Rolls-Royce and Turbomeca. Simul-
taneously the British Air Staff was thinking of replacing the Gnat, F-4 Phantom,
Hunter, and Canberra by 1970 and of equipping its forces with a supersonic
training aircraft. It therefore studied the requirement for an advanced aircraft

Chapter 13
11

that could carry missiles, but found it too expensive to continue such research
alone. Since the British Air Staff had a high opinion of the Mirage, Mystere and
Fouga-Magister and was in close contact with the French Technicians, it studied
the BR.121 in detail and came to the conclusion that, slightly modified, the
aircraft would meet British requirements. "As such the British aircraft indus-
try, the most highly developed in Europe, was in effect, given an aircraft to
13

work on."

As a result of the similarities of their two requirements, the two countries
agreed to synchronise their programs for the multi-purpose aircraft and thereby
produce a considerable saving in development and construction costs. By April
1965 British and French operational and technical experts had agreed on a conrnon
requirement. On May 17, the Defense Ministers of the two nations signed an MOU
that established the basis of the joint program as part of the package also
including the Anglo-French variable geometry (AFVG) fighter.

British industry, in this case BAG for both projects, was willing to abdicate
design leadership on the Jaguar since it was being compensated by what it
expected to be a lead role in potentially much more significant project, the
AFVG. The name Jaguar was chosen for the strike/trai ner aircraft, satisfying the
requirement of all such names for Anglo-French projects, that the word be the
same in both languages.

BAC was designated by the British government as Breguet 1 s partner to come up with
the final design, develop and produce the Jaguar. Within each collaborative

^Elise Novel, NATO letter, July/Aug 1968, pp. 10-11.

Chapter 13
12

team, the aircraft manuf acturers and the two engine manuf acturers , work would be

divided equally between the two nations firms. In November, 1965, Breguet and

BAG submitted a design proposal based on the Breguet 121. The design was frozen

the following spring. The time lost in harmonizing the two requirements is
estimated to be about four months. However, because these two requirements were

similar no extreme compromises were necessary and it is expected that the result

★

will actually be a better aircraft.

(B) Organization

On the i ntergovernmental level, under an Anglo-French Projects Group (overseeing
all Anglo-French projects), comes the Anglo-French Jaguar Management Committee. -
This Management Committee is comprised of government and military members repre-
senting both countries. It is assisted by four subcommittees which are: the
Airframe Technical Subcommittee, the Engine Technical Subcommittee, the
Production Subcommittee, and the Administrative Subcommittee.

Drawing on the earlier experience gained from the Concorde program (dating from
1962), the governments had decided at an early stage that there would only be two
contracts, one for the airframe and one for the engine. It was agreed that the
French government would act for the British government in placing the contract
for the airframe, and the British government would act for the French government
in handling the contract for the engines. The two airframe manuf acturers
established a joint company in May, 1966, SEPECAT S.A. (Societe1 Europeene de

TZ ~~ “

Aviation Week & Space Technology, May 16, 1966.

★

Edward H. Kolcum, "U.K., Germany Vie for Lead in Advanced Fighter Effort,"
Aviation Week & Space Technology, September 16, 1968, p. 91.

A. H. C. Greenwood, RUSI Journal for Defense Studies, July/September, 1972,

p.8.

Chapter 13
13

AIRFRAME & AVIONICS ENGINES (ADOUR)

Production de 1 'Avion d' Ecole de Combat et d! Appui Tactique) registered in
France and governed by French contract law. The two engine manuf acturers like-
wise established a joint company Rolls-Royce Turbomeca Ltd., but in this case
registered in the U.K. and governed by British contract law. In both cases the
firms were equal shareholders. SEPECAT S.A. signed a contract with the French
government's Direction Technique des Constructions Aeronautique (DTCA) and
Rolls-Royce Turbomeca Ltd., signed a contract with the British government's
corresponding agency, both then subcontracting the work to their industrial
shareholders. Both companies were only corporate shells, mechanisms established
for the contracting and sub-contracting of the work. As corporate shells, or
holding companies, they are without any staff of their own, drawing instead upon
the facilities of the parent companies. Both companies have a Board of Direc-
tors, with the Chairmanship alternating between the respective firms. Both also
have a Management Committee below the BOD consisting of four subcommittees for
coordinating the activities of the respective firms engineering project manage-
ment, production, finance, and sales. The use of a single corporate entity, the

result of progression from the Concorde to the Jaguar has been declared to

1 &

"...have worked very satisfactorily by the participants."

A 1972 Aviation Week Space Technology described DTCA's contracting and
project management approach to the Jaguar. "SEPECAT's production
contract with the French government involves fixed prices for fixed
starting dates, with only limited room for negotiating for unforseen
costs. There is, however, an escalation formula called, fixed
definitive, and fixed revisable, the latter to cushion effects of the
former in case of unforseen economic events, (that is in those areas
for which the contractor has no control, the usual inflationary/
exchange rate effects on the prices of wages and components). There
was also some cost-plus work available, but it applied only to the
flight test program, and then only when a cost item - such as increased
manhours due to flight test results were not forseen."

Ibid.

Aviation Week & Space Technology, September 4, 1972, p.53.

Chapter 13
14

"Due to a French concern early in the program that the Jaguar design
(essentially the Breguet 121) could be escalated beyond the projected
financial capability by over-design or preoccupation with areas beyond
the state of the art, extremely tight French contract procedures were
applied that effectively blocked any such inclinations. The French
placed continuous pressure on the joint program towards minimizing
design modifications and freezing the design as early asgpossible so as
to avoid jeopardizing the production schedule of cost."

"This basic French directive led to a management structure in which the
project manager system is carried into each main facet of the Jaguar
design, manufacturing, flight test, weapons systems development,
production, and product support -all reporting to their respective
firms project manager who coordinates with his counterpart of the
partner firm through the Engineering Project ,g

Management Subcommittee of SEPECAT's Management Committee.

On the airframe side, development and production is equally divided between the

two nations firms, following the natural breakdown into subassemblies, with

every effort having been made to avoid duplication in the production process.

Breguet builds the nose, the center fuselage, and the cockpit. BAG builds the

rear fuselage, the wing and tail assembly, and fits the engine. Dual final

assembly lines were set up in both the U.K. and France with the appropriate

airframe sections being shipped from one country to the other. Each country

assembles the aircraft for its own air force. Assembly for other countries can

be handled by either Breguet or BAC.

Ibid.

John Marriott,
October/November

"Anglo-French Cooperative Ventures,"
1976, p. 78.

NATO's 15 Nations,

Chapter 13
15

Jaguars an in squadron sewiea with the

Royal Air Fores fatme) and tfaa Frmeh Armm da /' Air .

womaeaters

jhk

jsmsk

■ ■ All 91 11 -low-level tactical strike and reconnaissance aircraft
lin EllJnll built by BAG and Oassauit/Breguet

intercontinental airliner

IJlUil vUilUE built by BAG and Aerospatiale

IS If II HU -multi role combat aircraft built by
I WlilfftHU BAG, Messerschmitt-Bblkow-Blohm and Aeritalia

II II RIF SI -ultra-low-level missile air defence system
■ Si'll ICi) built by British Aircraft Corporation

...each at the top of its class

BRITISH AIRCRAFT CORPORATION

the spearhead of technological achievement

lOO PALL MALL LONDON SW1

On the engine side, the development contracts for the Adour engine was divided
about equally between Rolls-Royce and Turbomeca. Rolls-Royce designed and manu-
factured the combustion sections, turbines, afterburner, fuel control, fuel
pumps and accessories. Turbomeca is responsibile for the design and manufacture
of the compression stages, the engine canopy and the gearbox. Each company also
builds the accessory packages for its share of the engine and each also has its
own assembly line.

Development costs for both the aircraft and its engines are shared equally by the

British and French governments. The total estimated extra development and

production costs compared to a purely national program were estimated as between

40 and 50 percent, but as such, only cost each individual country about 70-75

percent as much as if they had each gone it alone.

(D) Roles

Each country has procured its own version of the single-seat tactical support
aircraft and the two-seat trainer. Since both nations and both missions involve
many common characteristics, requirements were similar, no costly or dangerous
compromise was needed. j

Kolcum, op. cit. Another estimate of this collaborative premi urn/ i ndi vi dual
national cost savings was offered entitled "European Security: 1972-80"
published in the April, 1972, issue of the Royal United Services Institute (RUSI)
for Defense Studies, p. 148. The numbers cited by Brown were one third less on
R&D and perhaps 10-15% less on individual machines than they would have on a
unilateral project.

Chapter 13
16

The Jaguar is designed to undertake four major roles in all:

Battlefield operations in support of ground forces;

Interdiction operations over the battlefield and beyond;

Reconnaissance over the battlefield and beyond, and;

Advanced operational conversion flying training.

Four versions were built for the two nations:

The E-model, which is a two-seat advanced trainer, for the 1 'Armee de 1 'Air,
with two DEFA guns, an independent gyro gunsight, and a twin gyro platform;

The S model, which is a single seat tactical fighter for the RAF, with two
Aden guns, an inertial platform with a digital computer and a heads-up
display, and a. laser rangefinder;

The A model, which is a single-seat tactical fighter for the 1 'Armee de
1 'Air with two DEFA guns and a doppler/twin gyro with a navigation and
bombing computer;

The B model which is a two-seat operational conversion trainer for the
RAF, with one Aden gun, an inertial platform with a digital computer and
heads-up display, and;

Chapter 13
17

mmsMsam

N° 354 - Air Actu Sept/Oct 82

The M model which was a lighter single-seat attack aircraft with different

landing gear for the French Navy's carriers was cancelled due to its being

too heavy and too expensive. Instead they went ahead with the development

of the all-French Super Etendard.

E. Devel opment

The development cost for Jaguar was quoted as being $196 million in 1966.

Initial plans, as of the fall of 1966, were for a production run of about 300
aircraft for the two countries collectively, while export potential was yet to be
determi ned.

As of February 1967, the Jaguar was scheduled to make its first flight in 1968
with operational service to begin in 1970. At this time France was expected to
purchase 150, and the UK 100 Jaguars.

The Society of British Aircraft Companies (SBAC), meeting in October 1966
criticized continuing British government delays in decision-making on a number
of vital projects. As for the Jaguar project in particular, the absence of

authoritative cormient was said to be giving rise to wild speculation, reassurance

being needed on the joint program's future.

The Jaguar project becomes the first project to be endorsed 'NATO Project' in
November, 1967, by NATO' s. Conference of National Armament Directors (CNAD)

____________

Marriott , op. cit., p. 79.

23 .

Aviation Week & Space Technology, October 17, 1966, p. 29.

Chapter 13
18

through the application of the new cooperative procedures set up by NATO and

contained in the NATO Unclassified, Document C-M (66) 33, "Cooperation in

Research, Development and Production of Military Equipment." This procedure

replaced the previous NBMR (NATO Basic Military Requirements) procedures dating

from 1959. ( C -M ( 59 ) 82) The new cooperative procedure being applied by NATO was

aimed at meeting with greater flexibility the principal NATO objectives in the

research, development and production of military equipment. May 1968 events in
France followed by a prolonged strike delayed the program.

During 1969, following the first flight of the first prototype in September 1968,
flight tests were progressing slowly due to problems created by the simultaneous
development of airframe and engines. As a result of budget shortages early in
the definition phase, it was decided that a flying test bed for the Adour engine
would be eliminated so as to keep development costs low. Engines were therefore
developed as far as possible in ground test cells and flight tested for the first
time in the E-01 prototype (which crashed in early 1970). Since the Jaguar is a

twin engine aircraft there is a safety factor in using untried engines on the

Jaguar prototypes.

Some problems were expected due to the parallel engine and airframe development
but there turned out to be more than anticipated. This was mainly the result of
the engines being constantly cycled in and out of the shops for modifications.
Each time a new or modified engine is installed in a prototype, the first series
of test flights are taken up verifying engine performance. Since the Adour

Novel, op. cit., pp. 16-17.

"Jaguar Production Starts with 80 ordered," Aviation Week & Space Technology,
April 27, 1970, p. 111.

Chapter 13
19

engines are government supplied items (UK), SEPECAT has no control over their
availability. The governments did not plan on the high replacement rate encoun-
tered with the development engine or on the long factory turn-around time
requi red for rework and modification. Program officials felt that in retrospect
it probably would have been a good idea to have included parallel flight tests of
the Adour in the program.

The two governments encountered considerable difficulty in reaching an agreement
on whether to use the metric or the Anglo-Saxon measurement scale on the air-
craft. As such all drawings were made with measurements in both scales. Since a
final decision had not been reached by the time prototype construction had
started, BAC built its portion using the inch scale and Breguet followed the
metric system in its respective areas of responsibility. Although the use of two
different measurement scales on the prototype did not cause major problems, some
interface, problems were encountered between BAC and Breguet portions of the
aircraft. These resulted in some delays in the building of the prototypes.
Nevertheless, these problems were solved for the production phase, the Anglo-
Saxon scale having been finally agreed to for the production models. Some French

supplied equipment, however, which is not serviced in the field still may use the
27

metric scale.

Ibid.

Chapter 13
20

F. Production

The British and French Ministers of Defense signed a production agreement for 400

Jaguar aircraft, 200 each, on January 9, 1968. The agreement contained a penalty

clause in the event that either government decides not to take its full quota of

200 aircraft. At this time production deliveries were expected to start in early

1970, building to full scale in 1971. SEPECAT (i.e., Breguet and BAG officials)

predicted that building on their large order base the Jaguar will become a major

export item, during the 1972 - 1982 period. SEPECAT is concentrating its export

effort on those countries that need a low cost aircraft that can perform as many
28

roles as possible.

Because component contracts could be competitive across the wider industrial
base offered by the combined industries of the two countries, one estimate
figured that a savings of about 15% had been realized.* *

The Jaguar program entered its production phase in April 1970 with the commitment
of funds for an initial order of 80 aircraft from the two governments. First
deliveries were to go to the Armee de I'Air in June 1971. Average flyaway cost of
the Jaguar was quoted at SI. 5 million and with total costs, including spares and
support costs, amounting to a bit over $3.0 million. The cost of $1.5 million is
based on a sales forecast by the SEPECAT team of a total of some 800 aircraft,
including 332 exports of the tactical version and 71 for the trainer version.

"U.K., France Sign Jaguar Production Pact," Aviation Week & Space Technology,
January 15, 1968, p. 24.

*Ki lcum, op. cit.

Chapter 13
21

While Jaguar flight development progresses - the second
prototype flew supersonically on its very first flight in
February - production lines for the 400 aircraft for the
British and French Air Forces and French Navy have been
laid down at the factories of British Aircraft Corporation's
Preston Division and Breguet Aviation in Toulouse and
Biarritz. Initial manufacture is divided equally between the
single-seat tactical strike aircraft and the two-seat advanced
trainer, following the eight prototypes built for development
flying. Jaguar's smooth transition from prototype construc-
tion to full production status illustrates the suitability of this
versatile Anglo-French military aircraft for licensed pro-
duction in other countries.

N * - -- ;

S.E.P.E.C.A.T

IgSHilg British Aircraft Corporation

100 PALL MALL. LONDON. S.W.1.

■ H Breguet Aviation

■ 78-VELIZY-VI LLACOU B LAY, FRANCE

The production rate was low to begin with, because prototype flight tests were
still underway. This eliminated the time lags encountered in the traditional
system of development prototypes, pre-series prototypes and finally the produc-
tion aircraft. Therefore, during the initial period while the production rate
was very low, modifications resulting from the final portion of the prototype

flight test program could be incorporated in the production aircraft. The rate

would then increase sharply when prototype testing was completed.

This production plan was also more compatible with the needs of the two govern-
ments, as they must fund batches of aircraft progressively on an annual basis in

accordance with budgetary limitations.

Test engines gradually became available in greater supply during 1970, correct-
ing a shortage that had occurred early in the year. The main problem involving

the afterburner system, was overcome, and by late summer the first production

~™ 31

engines were being bui It*

In 1970, the British electronics industry asked the government to review its
policies on demanding license agreements with European firms as part of collabor-
ation in joint European projects. British industry leaders expressed fears that
Britain was building up European avionics expertise that will redound in the form
of new competitors in the future. As reported in the May 11, 1970 issue of
Aviation Week & Space Technology,

"jaguar Production Starts...," op. cit . ,

Ibid.

P. 111-113.

Chapter 13
22

In its presentation to the British government and Ministry of Tech-
nology, the Electronic Engineering Association pointed out that France
has design leadership in the Jaguar strike fighter/trainer and the
SA.330 and SA.340 helicopters. Germany controls design on the multi-
role combat aircraft (MRCA), and Britian retains leadership only on
the Westland WG.13 helicopter.

Abdication of leadership, the association continued, meant passing
control of onboard and related electronics to other countries, and
added: In the case of Jaguar, extreme pressure was placed upon
(British) industry to negotiate manufacturing arrangements in France.

Any British company attempting to negotiate such an agreement was
placed in a position of negotiating from weakness, as it was a prior
condition that equipment must be manufactured in France in order to
have equipment specified on the aircraft.

The industry complained that the terms imposed on British firms were
such that an "enormous amount of know-how and development experience
was given to France, without any corresponding benefit to the British
i ndustry .

The government was reminded that prior to the Jaguar agreement, France
was a large export market for British electronics, since the majority
of avionics in the Dassault Mirage 3D and 3E, and Mirage 4 bomber was
designed and supplied by British firms.

It is now likely, according to the association, that any competitive
advantage gained through participation in the Dassault projects has
been eroded by agreements which have since been forced upon the British
i ndustry in cooperative projects.

The industry also fears that in the MRCA program, it may be committed
to supplying information and designs to the other participating
countries - Germany and Italy - on commercially unsatisf actory terms.

The result of these agreements might be that British industry would be
compelled by government actions to build up yet further competitors
throughout Europe, the association continued.

In 1972 a third major strike, this one at the BAC plant, caused a slippage of

about three months in development work, although some production hardware work

was shifted to France.

"U.K. Electronics Makers Ask Review of Cooperation Policy," Aviation Week &
Space Technology, May 11, 1970, p. 59.

Chapter 13

The RB.172/T.260 Adour engines afterburner problem, which had been a major
problem for the Jaguar program was finally overcome, but was estimated to have
added about $12 million to the cost of the program.

A flyaway unit price, having originally been based on a production of 800 planes,
was now at $2.5 million plus an annual escalation of 8 percent.

The first Jaguar squadron in the Armee de 1 'Air was operational by mid 1973, and
a second French squadron of Jaguars was operational early in 1974. By the fall
of 1976 115 Jaguars had been delivered to the Armee de TAir (the order having
been reduced to 170 but later restored to 200) and 146 to the RAF. As of 1976,
the Jaguar had become the British industry's biggest production program.

G. MARKETING

In October 1966, a SEPECAT sales team was trying to sell the Jaguar in Australia,

New Zealand and Japan. Talks were also underway with the FRG. SEPECAT' s total

production forecast for the Jaguar was 1200 - 2000.

Prospects that the FRG would join the Jaguar project were strengthened in March
1967, when a plan was announced for the FRG to buy $500 mi lion in U.S. bonds in
order to offset the costs of keeping U.S. troops in the FRG. The move freed the
FRG from its commitment to purchase U.S. military equipment and thus permitted an
expanded German participation in European military joint development and produc-
tion programs. The FRG was exploring the possibility of entering the Jaguar

Aviation Week & Space Technology, February 13, 1967.

Chapter 13
24

production program as a replacement for its Fiat G— 91 close support aircraft* *.

During the sunnier, the FRG was told that it had until October to decide on

participation or not, since the Jaguar program could not cope with drawn out
34

negotiations. In the end, the FRG opted out of the program.

France pulled out of the parallel AFVG fighter program in mid-1967, but with no
disruption to the Jaguar half of the fighter package. The first flight of a
Jaguar prototype was expected for March 1968 as of this time. However, with the
collapse of the AFVG fighter project and the similar fate awaiting the
U.S. /German AVS fighter project in January 1968, the FRG and the UK (again BAG)
were able to get together on another fighter the following year, the Tornado.
Two years later in 1970 with launching of the Alpha Jet project the Germans
joined up with French (again Dass aul t-Breguet ) to obtain a G-91 replacement.

The salability of the Jaguar in the export market is beginning to be disputed by
some observers, particularly in France. Even though the 1964 specifications for
the aircraft contained a clause that it be inexpensive, certain estimates as of
the sumner of 1968 indicated a unit cost in excess of $3 million. At this time
program officials were declining to discuss unit costs.**

In 1970, SEPECAT presented the Jaguar to a number of countries including
Switzerland, Australia and the United States. North American Rockwell Corp. had
shown some interest in licensed production, having at one time considered trying

"German Jaguar Participation Expected," Aviation Week & Space Technology,
March 20, 1967, p. 22.

*Donald E. Fink, "Politics Alter German Air Force Plans," Aviation Week & Space
Technology, April 3, 1967, p. 35.

**Koleum, op. cit.

Chapter 13
25

to interest the U.S. Navy in it and the low R&D costs involved. A derivation of
the Jaguar was specially prepared for the USN while another had been previously
adapted for the tJ.S.A.F. as a T-38
replacement.^

The British government, apparently with the French government's approval,
embargoed the sale of the Jaguar to the Egyptian Air Force, in November, in spite
of an urgent request from Cairo for the aircraft.

In 1973, a low-key effort to set up a BAC/Hawker Siddeley Aviation consortium in

order to sell the Jaguar and the HS.1182 Hawk jet trainer as a package collapsed,

when the Belgians selected the Dassaul t-Breguet/Dornier Alpha Jet.

Later in the year though, British industry again teamed up in a major effort to

sell the Jaguar to Belgian as an F-104G replacement, but this time in competition

with the Dassault Mirage F-l. Although ostensibly the Belgians were still

interested in the Saab Viggen and the Northrop Cobra, it appeared at that time

that the contest would be primarily between the Jaguar and the Mirage F-l.

Consequently, for the second time in one year BAC found itself competing against

its French partner. In what appeared to be a unilateral move, a British
industrial team consisting of BAC, Rolls-Royce, GEC-Mari oni Elliott, Smitns
Industries, and Plessey presented the Belgian government with an industrial
package deal that would give a large portion of assembly work to the Belgian
firms SABCA, Fairey and several avionics companies. A complete license was also

35~“_

"Anglo-French Jaguar Enters Production Cycle," Aviation Week & Space
Technology, September 7, 1970, p. 54.

Aviation Week & Space Technology, November 20, 1970, p. 24.

"British Push Jaguar in Belgium," Aviation Week & Space Technology, December
10, 1973, p. 23.

Chapter 13
26 •

a possibility. Dassault was also offering a work sharing plan. The initial

Belgian order was to have been for 50 aircraft.

Neither the British nor the French governments took any overt actions to support

or block the British industrial move. The British deal was made with the

knowledge of SEPECAT, but Dassaul t-Breguet had now assumed a lesser role in sales

promotion. In any case, Dass aul t-Breguet would still have had a share in any

Belgian order for the Jaguar under the joint agreement. The situation was
drastically reversed however, early in the following year when Belgium opted to
form a purchasing consortium for the F-104G replacement with the Netherlands,
Norway and Denmark which among other things eliminated the Jaguar as a serious
contender.

This dilemna of BAG found itself in that of competing with its partner, stemmed

from a French government policy of the late 60' s. As part of an effort to

consolidate French industry and improve its international competitiveness the

French government asked Dassault and Breguet back in January 1967 to explore the

possibility of closer cooperation, and possibly even merger. In May 1967,

Dassault and Breguet announced their planned partial merger with Dassault

purchasing a 66 percent of Breguet' s stock. The two firms have been brought

together under a single top management team, while they will each continue to

function independently at the operating level for several more years. Dassault
and Breguet finally consumated a 100% merger in October, 1971.

Ibid.

^"Europe Challenger U.S.
Mary 18, 1968, p. 91.

for World Market, " Aviation Week & Space Technology,

Chapter 13
27

photo shows details of an Indian Air Force Jaquar of its initial batch of forty

During the five years following the Belgian competition the only third country
orders for the Jaguar were for a total of 24 aircraft from Oman (12) and Ecuador
(12).

In early fall 1978 the Jaguar's first major export break came when the Indian
government decided in principal to buy 200 Jaguar aircraft over the Dassault-
Breguet Mirage and the Saab Viggen to replace its fleet of BAG Canberras, and the
Hawker-Si ddeley Hunters. 40 of the aircraft are to be assembled in the UK (but
manufactured by the SEPECAT partners in both the UK and France) and the rest are
to be built in India by Hindustan Aeronautics, Ltd. Serious negotiations between
BAG and the Indian Air Force had begun in 1973, with it having been hot or cold
ever since, largely over the question of fi nancing. The agreement was signed by
British Aerospace (the result of the 1977 merger of BAG and Hawker Siddel ey) and
not by SEPECAT, since the Indian government had chosen the version with British
avionics.4'1'

"India selects Jaguar International," Aviation Week & Space Technology,
October 16, 1978, p. 26.

Chapter 13
28

H. Conclusions

As in all of the European codevelopment and coproduction programs the Jaguar
program has its quota of pluses and minuses. On the negative side there are the
usual increased time and cost problems, the greater vulnerability due to its
exposure to two national political/economic environments, and the basic
conflicts of national interests that inevitably crop up in such transnational
ventures. The specific manifestations of these in the Jaguar program with
regards to cost involved on overall program price of about 40 - 50% higher than a
one nation effort. For the increased time involved in coordinating such a
venture, there are such problems as the several months of disruptions caused by
each of the strikes France (1968) and the UK (1972). These strikes are also
examples of the increased vulnerabi lity of such programs to destablizing events
occurring in either nation. The difficulty in reaching a mutually acceptable
compromise with the issue of the metric versus the Anglo-Saxon measurement
systems was yet another example of the conflicts that can crop up.

An example of national economic policies impinging upon the interests of such a
venture and which has also probably been the most serious difficulty faced by the
Jaguar project, is that of the merger of Dassault and Breguet, partially in 1967
and totally in 1971, once the program was under way. This merger was part of
process strongly promoted by the French government of consolidating industrial
sectors along national lines so as to strengthen French industry for competiting
in the world market place. Valid as this policy was, nationally, it had,
however, a negative effect on the export potential of the Jaguar and thus conter-
acted the supportive effect of the French half of the 400 plane order base. As
for Dassault it is unlikely that it would ever have taken part in such a project,

Chapter 13
29

since it was seen by the Dassault sales office to conflict with the market for
the Mirage, and later the Alphajet as well. Dassault is also among those French
critics that dispute the general salability of the Jaguar on the basis of its
cost.

Then there is the criticism of all such projects with regards to the inevitable
inefficiencies that result when attempting to satisfy the principles of 'juste
retour' within one project. In structuring the transnational venture, effi-
ciency would suggest that British industry having Europe's dominant avionics and
jet engine industry develop and produce the engine and avionics. But if this
course was followed the heart of the project, the airframe would go principally
to French industry with Britian's airframe firms losing out.

The airframe part of a project is of major importance not only in sustaining and
developing this key national industry but also vis-a-vis the national prestige
associated with the project. In order to avoid such a contingency and still
satisfy all the national constituencies engine and airframe development and
production are each split up 50 - 50, along lines paralleling the sharing of
costs. This in turn has meant a flow of technology from the British engine firms
and avionics firms to their French competitors.

All this considered, there is also the positive side of the program. As always
with these joint development and production programs there are the usual
advantages of considerable import: industrial, technological, BOP, independ-
ence, prestige, and the experience gained. There are also several other particu-
lar advantages occuring to the programs credit. First, because component
contracts were competitive, principally between British and French companies

Chapter 13
30

(Cne c/e Foucaud)

(within the 50 - 50 work sharing constraint) it was estimated that savings of
around 15% were realized. Second, BAG'S contribution to the program of a greater
experience in reasonably high rates of mass production was complimented by the
greater experience of Breguet in transnational ventures (resulting from the
Atlantic program). Third, export prospects are improved because of the two
privileged spheres of influence as well as from the proposed number of versions
(though significantly counteracted by cost and the Dassaul t-Breguet merger).
Fourth, although the program cost some 40 - 50% more than a one nation effort,
the saving to each nation individually from establishing a joint program was some
25 - 30%. Fifth, in spite of the limited export results of the Jaguar itself, the
Adour engine developed in parallel for the Jaguar has found a wider market, also
powering the Mitsubishi T-2 trai ner and the Hawker Siddeley Hawk trainer. Sixth,
again in spite of the export problems, the substantial order base of 400 aircraft
(itself an increase over the original combined estimate of a need for 250 - 300
aircraft) was maintained. Finally, one last point emphasized throughout the
literature was the excellence of the cooperation between the national teams of
engineers and mechanics. The language problem was overcome by crash courses in
the opposite language held on both sides of the channel and the minimal flight
time of 45 - 90 minutes between the two nations plants allowed for frequent
meetings on very short notice. In the words of Mr. Vallieres, the Managing
Director of Breguet: "the friendship between our two teams has been one of the
essential elements in our success; with a staff that could not have got on
together, the business would have been seriously handicapped. We have learned to
know one another and, each depending on the other, we have worked ... in a most
brotherly way. This is very important. "14

Nouel, Elise, NATO Letter, July/August, 1978, p .17.

Chapter 13
31

B. THE PUMA -GAZELLE -LYNX HELICOPTER

DEVELOPMENT AND PRODUCTION PACKAGE

In early 1967, after around a year of gestation, France and the United Kingdom
signed an MOU covering the joint development and/or production of three helicop-
ters, the SNI Aerospatiale (SNIAS) Puma and Gazelle, and the Westland Lynx.
Cooperation had begun in early 1966 between Sud-Avi ati on , now SNIAS, and
Westland, followed by similar arrangements between Turbomeca and Rolls Royce for
the power plants. After a broad analysis of British and French helicopter
requirements the Anglo-French Projects Group had decided that it was possible to
reach a common technical definition for the basic helicopters, with each country
then fitting the helicopters with special equipment to meet their own particular
needs. The United Kingdom had only a limited requirement for a Puma-class
transport helicopter (already developed in France) while the same was the case
for France with a Lynx general purpose and naval helicopter (yet to be
developed). In each case where the requirement was limited development and
production cost would have been excessive in proportion to the guaranteed
domestic order base. For the Gazelle light helicopter (yet to be developed) both

partners required similar numbers. In all three cases the larger order base was

expected to facilitate access to the international market.

The principle adopted for the organization was to maintain responsibility under a
sole authority at both the government agency and contractor levels. Contracts

Henri A. Ziegler, International Cooperation in Aerospace Projects: Cooper-
eration Between European Industries and Between Europe and the United States,

text of a paper presented to and published by the American Institute of

Aeronautics and Astronautics, in 1975.

Chapter 13

PRODUCTION DEVELOPMENT AND

ONLY PRODUCTION

-n>

Three Anglo-French Helicopter Projects

are placed on behalf of both countries by the executive agency of the prime
contractors national government, the financial aspects then being settled
between the governmental authorities. Each prime contractor is technically,
industrially and conmerci ally fully responsible for its product. However, for
export sales, the two firms' sales teams work in coordinated effort. Work
sharing is distributed between the prime and subcontractor of the respective
projets approximately in proportion to national orders. In the integrated
prime/subcontractor relationship there is no duplication of parts manufacture,
but the national firms do outfit the special versions for their respective
nations.

As in the case of the Jaguar, the whole helicopter project is overseen by the

Anglo-French Projects Group at the intergovernmental level. Westland and SNIAS

each have permanent representatives stationed with each other, both on the

engineering and the sales side. The Rolls Royce and Turbomeca partnership goes

back a long way and their interchange of engineering personnel extends down to
43

apprentice level.

Collaboration amongst the working staffs has reportedly gone very well. Although
the French are better at learning English than the English are at learning French
(as might be expected for Anglo-Saxons), there has really been no language

problem. The somewhat higher costs involved than for a purely national project

> 44

have been reducing as experience is gained.

Ibid.

Marriott, op. cit.,

p. 78.

Chapter 13
33

PUMA offers two basic
trumps to arn]ed
forces : speed and
safety, regardless of
the altitude, climate
or terrain. Able to
complete its mission
on one engine, PUMA
can carry 21 equipped
men at 250 km/hr (155 mph)

the tactical transport that is not a gamble...

NATO'S FIFTEEN NATIONS. OCT. -NOV. 1976

To further consolidate and extend their collaboration Westland and SNIAS formed a

joint company, Heli -Europe in September 1974. Hel i -Europe has taken over the

management responsibility of the current Puma, Gaxelle, and Lynx programs and has

been exploring further collaborative efforts both between these two firms as well

as in associating the other European helicopter firms.

1. SA.330 Puma

SNIAS had already commenced with the production of the SA.330 Puma when the MOU
was signed in early 1967, its first flight having been in April 1965. Thus apart
from a small development contract from British government for the installation of
certain equipment to British mission requi rements , the Puma was unilaterally
developed by SNIAS. As for production, Westland produces, as principal subcon-
tractor to SNIAS, part of the fuselage and engine cowlings, tail rotor blades and

various_other items and Rolls Royce produced part of the engines. In all some

27% of the production is British.

An additional point that is worth mentioning, as it is representative of the
extensive ties that Sikorsky has established in Europe generally, the Puma's
blades are based on technology obtained in a cooperative program involving SNIAS
and the U.S. firm.

Ibid.

Ibi d.

Chapter 13
34

aerospatiale

DIVISION HELICOPTERES

2 & 20r avenue Marcel-Cachin - 93126 La Courneuve - FRANCE

The Puma was designed to meet a 1963 French Army requirement for a highly

maneuverable tactical helicopter capable of high speeds for troop transport,

light cargo transport, and logistic support. The troop carrier version can seat

16 troops and the cargo carrier version has 353 cu. ft. available. The Puma is

The original order base provided for the Puma by the two governments included 48

for the RAF and 130 for the French Army, but both dropped somewhat - the British

order to 40 and the French order to 115. As of spring 1977 some 525 Pumas had

been sold, 2/3 of which were for export. From the beginning the Puma has had a

remarkable sales history, with some 163 having already been sold to six customers

before the first production model had even been built.

Apart from the continual improvements to the basic design, a new development, the
Super Puma, has been underway. Since the French military has no requirement for
such an aircraft it will be oriented towards the civil and export markets.

2. SA.341 Gazelle

The SA.341 Gazelle was a joint development project from the start with SNIAS as
the lead contractor. The design was based on the very successful Alouette II.
Being still in the early design state when the protocol was signed in early 1967,
both British and French requirements are reflected in the design. Although

Ibid.

Edward H. Kolcum, "Sad Broadens Helicopter Marketing Base," Aviation Week
& Space Technology, February 2, 1970, p. 52.

Chapter 13
35

HOT

EUROMISSILE also provides optimum
advanced technology missiles :

The MILAN man-portable
anti-tank weapon system.

defence capability with two other

The ROLAND low and very
low-level surface-to-air battlefield
defence system.

The only tank killer
with a 4000 m range

The HOT anti-tank missile can be fired from
land vehicles or from helicopters.

Installed on a fighting helicopter,

its 4000 m (13,000 ft.) range is of truly

vital importance from a tactical point of view.

When fired from a land vehicle,
its destructive power cripples enemy armoured
forces before they have time to use their
own weapons.

Various firing and guidance systems
are available.

Now in production for the French,

German and other customer armies.

missile

7, rue Beranger - B.P. 84 - 92320 Chatillon (FRANCE)

AlROSPATIALi/FRANCE J RSESSERSCHMITT-BOLKOW-BIOHM
PARIS j MUNCHES

euro

in cooperation with WESTLAND HELICOPTERS

NATO'S FIFTEEN NATIONS. OCT.-NOV. 1976

Westland was only a minority development partner for the Gazelle, Westland

produces approximately 65 percent of the aircraft. The remaining 35 percent is
49

produced by SNIAS . This distribution is in part due to the original British army

order being for 250, while French army order was for some 170. The first

deliveries were in 1972, and as of Fall 1976 the French army was still to get 170

Gazelles, with the British order being down to 214.

France had been responsible for a delay in 1969 in obtaining approval for full

production pending final analysis of the effect of the devaluation of that year

on the total French defense procurement picture, but unlike with the WB.13 Lynx,

no cut in the French army order resulted.

The Gazelle's engine is a Turbomeca Astazou 1 1 IB built in cooperation with Rolls
Royce.

The Gazelle is designed as a light, multi-purpose machine and it can carry up to
three passengers plus a pilot and co-pilot. It can carry anti-tank missiles and

can be used in a large number of roles including reconnaissance, artillery

observation, transport and casualty evacuation.

Marriott, op. cit.

"New Orders Bolster Helicopter Program," Aviation Week & Space Technology, .
September 7, 1970.

Marriott, op. cit.

"French Cancel Helicopter Order," Aviation Week & Space Technology, November
3, 1969, p. 18.

Marriott, op. cit.

Chapter 13

Royal Navy Gazelles in formation.
Photo: Fleet Chief Petty Officer Charles
Robinson, R.N.A.S. Culdrose

<•

Over 700 of the Gazelle had been sold by spring 1977. It is also being

manufactured under license in Yugoslavia.

According to 5 HI AS marketing officials the combined export sales effort has some

built in advantages. For example vis-a-vis negotiations in 1970 for sales of the

Gazelle, France has traditional and linquistic this with Romania, French

speaking sales teams being especially effective there. France and Romania also

had a trade and technology agreement signed in mid-1970, which also helped.

Whereas in negotiations in the same year with Australia, a Westland sales team

carried the main burden in negotiations for similar reasons.

3. W6.13 Lynx

In the case of the third Anglo-French cooperative helicopter project, the WG.13

Lynx, Westland is the prime contractor. SNIAS is the minority development

partner and as subcontractor has some 34% of the production. The Lynx was also

designed to meet the requirements of the British and French Armed forces.

There are two versions the general purpose machine and the Naval Lynx. The

general purpose version can be used for troop transport-seating up to 10 fully

equipped soldiers as well as an ambulance and freight carrier. The naval version

is primarily used for anti-submarine and surface strikes.

“The French aerospace industry -
419.

“New Orders...,” op. cit.
Marriott, op. cit.

Ibid.

on course for the 1980 ' s?," Interavi a, 5/1977,

Chapter 13
37

Britain is to arm some 100 Lynx helicopters with the Hughes Aircraft Co. s TOW missile. TOW launchers on a Westland-Aerospatiale Lynx
helicopter.

Source

NATO's Fifteen Nations

The combined Anglo-French order base for the Lynx went through a tumultuous

period during 1969 and 1970. The original plan had been to build about 520

Lynxes in five versions for the two nations armed forces plus a civil version.

In October 1969 however, citing post-devaluation financial reasons, the French

government cancelled its order for about 150 Lynx aircraft for the French Army.

At this time however, the French Navy was still planning on taking its original

number of about 80. Concurrently the British army which was to take the rest of

the Gazelles, was reportedly quietly investigating the Bell Jet Ranger as an

alternative off-the-shelf buy or with partial construction by Westland.

However, a month later both governments approved full production of the Gazelle
and development of the Lynx.

Then, once again, in the Spring of 1970, French officials raised the possibility
that they might not be able to order 80 of the Lynx helicopters for the French
navy, because of budget restrictions and the large investment required for the
French nuclear submarine fleet. The whole Anglo-French helicopter program then
came under review, as it seemed that it might be going the way of the joint Jaguar
and variable sweep fighter development package before it (i.e., the British
traded off design lead for the Jaguar against design lead for the variable sweep
fighter, but then the French pulled out of the latter of which the Jaguar was the
surviving half). However, the helicopter package did hold together, and the new
French commitment to order 40 Lynx has been maintained.

°"French Cancel...," op. cit.

"Budget Squeeze in France Spurs Taks with British on Helicopters," Avi ati on
Week & Space Technology, April 13, 1970, p. 21.

Chapter 13
38

Also in 1970, the Lynx was being considered by the USN for its light airborne
multi-purpose system (LAMPS), with United Aircraft Corp.'s Sikorsky division as
potential licensee. Other U.S. manufacturer* s were reportedly interested, but
in view of Westland's long relationship with Sikorsky, Sikrosky was to be given
first refusal

As of late 1976 firm orders by the British armed forces stood at 93, and by early
1978 total orders for the Lynx were 231, being in service currently with the
British army and the navies of France, the U.K. , Netherlands, Denmark, Brazil,
and Argentina. ^ Norway and the FRG have since placed orders as well, which means
that as of 1980, six NATO European nations were using this one helicopter.

Contributing to a several year delay in the development of the Lynx has been the
difficulties with the Rolls Royce B5-360 engine, which was being specially
developed for the project.

In addition to the previous total of 231 orders, in March 1978, the four Arab
nations participating in the Arab Organization for Industrialization (AOI i .e. ,
Egypt , Saudi Arabia, Quatar, and the United Arab Emirates) ordered the first
batch of 50 Lynx helicopters of an anticipated order of 250. Westland and AOI
had formed a joint company, called the Arab British Helicopter Co., to manufac-
ture the Lynxes in Egypt. The first batch of 50 were to be split, with the first

^"New Orders . . . ," op. cit .
fil

"Rolls Royce in $200 Mil 1 ion Middle East Helicopter Engine Deal," Aerospace
Daily, March 3, 1978, p. 20.

Chapter 13
39

20 helicopters being manufactured by West! and/SNIAS, the remaining 30 to be
assembled in Egypt. Subsequent batches of 50 were to built increasingly in
Egypt, with about 80% of the final group manufactured there. The total produc-
tion run for the 250 helicopters envisioned at that time, was expected to last

about seven years . As with the similar arrangement for the Alphabet's joint
production with the A0I, these have been suspended in line with Saudi -Egyptian
split following the latter's peace agreement with Israel.

4. The 3 Projects and the Progress of the European Helicopter Industry

The three helicopter program was an important part of a process, by which
European helicopter industries have increased their independence and competi-
tiveness vis-a-vis the American industry (if not with regards to each other).

This bi-national program facilitated the two firms overcoming of the initial
hurdl es_of financing and risk that would ordinarily have been faced in focusing
their initial effort toward the limited national market provided by their
respective armed forces.

In the period following WWII extensive industrial relations were developed
between U.S. and Western European helicopter firms. As of the early 1950' s the
U.S. designed and built some 72% of the helicopter inventory of the non-communist
world and a further 12.5% were U.S. products built under license in Europe.

Western European production of helicopters of their own design accounted for the

• • 1 r a/ 63

remaining 15%.

Ziegler, op. cit.

Chapter 13
40

The U.S. industry began to cooperate extensively with its European counterparts
in the late 1940's, initially as licensors, but later also in terms of techno-
logical exchange. Of particular importance are the Sikorsky-Westl and and the

Bell -Agusta relationships.

As early as 1947 a first license agreement was signed with Westland for the S— 51

helicopter of which it produced about 130 aircraft as the Westland Dragonfly.

Later, in 1950 another license agreement was signed for the S-55 Whirlwind, in

fi4

1956 for the Wessex and in 1969 for the S-61 Sea King.

In 1962 Sikorsky entered into an agreement with Sud-Aviation (now part of SNIAS)
for a license of the S-68 and a few years later, when Sud decided to go ahead with
developing the Super Frel on , a cross license agreement was signed together with
an agreement covering technology exchange. In 1965 Sikorsky also signed licensing
agreements with Agusta in Italy and several years later with VFW in the FRG for
the CH-53.65

Bell and Agusta in Italy established an extensive relationship comparable to that
between Sikorsky and Westland.

By the late 1970 ' s the Europeans had recaptured a significant share of their own
domestic markets, as well as having established a very strong position in world
markets, including licensing of European designed helicopters to such developing

Ibid.

Ibi d.

Chapter 13
41

nations as Indonesia, Brazil and Egypt. By 1973 only 15% of the European
inventory had been manufactured in the U.S.^ The Puma-Gazelle-Lynx package has
made a substantial contribution to this effort. There were also such single firm
successes as the MBB B0-105 and Agusta A-109 observation and liason helicopters;
and the SNIAS Lama, Dauphin, Ecureuil (known as Astar in North America), the
Super Frelon and the extremely successful Alouette series (the helicopter
division of SNIAS is second only to Bell in world helicopter production). These
are being further complemented by such new programs as: The SNIAS -MBB -BAC armed
anti-tank helicopter; the Agusta A-129 attack helicopter, the ETHEL European
tactical transport helicopter, a possible European equivalent to UTTAS,
involving potentially SNIAS, MMB, Westland and Agusta; the SNIAS Super Puma; and
the MBB-Kawasaki BK 117 utility helicopter.

In July 1978 the process begun with Westland and SNIAS as well as their respec-
tive governments, further reinforced by the IEPG and the general momentum toward
increased intra-European transnational collaboration, resulted in the Defense
Ministries of the UK, the FRG, Italy, and France agreeing on a plan to develop a
new generation of military helicopters. The details are being worked out under a
steering committee composed of representati ves of the chief of staffs of the four
countries and the four national helicopter firms concerned i.e., Westland, MBB,
Agusta and SNIAS. The agreement under the guise of a "Declaration of Principle"
was reached at a meeting of the ministries in the UK. The aim is to define a new
helicopter gun-ship, a new tactical transport helicopter and an anti-submarine
hel i copter .^7

Ibid.

Aerospace Daily, July 25, 1978, p. 101.

Chapter 13
42

In sunmary, the successful Anglo-French 3 helicopter package has furthered the
generation of a large bank of European technology and collaborative know-how that
will make the next generation of European helicopters even stronger competitors
in the .world markets, while further reinforcing the divergence of the aerospace
industry - government contracting environments on the two sides of the Atlantic.

Also of importance, especially with regards to this Mode, the use of the "family
of weapons" approach represented by these three projects will hopefully be
expanded to transatlantic collaboration for other weapon system as well. In
spite of the unwieldy nature of this approach and with its vulnerability to the
unilateral actions of the participants, the "family of weapons" approach is
another feasible i nstrumental ity for the improving of NATO RSI, be it on an
intra-European basis, or a transatlantic basis.

5. Conclusion

Two previous points are in need of qualification - the greater efficiency
resulting from this package deal and that the initial order base was increased.

On the first point, although, this arrangement did allow for a relatively
rational distribution of work internal to each project at the i ndustry-to-
industry level and a one firm-one contracting agency relationship (both being of
the same country) one fundamental fact cannot be avoided - there were still two
customers. Whatever the measures that can be taken to simplify the contracting
relationship, the underlying fact of a multi-customer project remains. Citing
Westland's manager director, " . . .the management effort is very large. We deal

Chapter 13
43

with two governments, two treasuries and technology ministries and six
services." As for the second point, not unexpectedly, in the case of all three
of these projects a somewhat greater vulnerability to the erosion of orders was
displayed with regards to those orders made by the nation playing a secondary
role. Whether this was due to the particular armed forces having had a less
urgent requirement for the system to begin with, especially in a period of
drastic defense pruning in both nations, or whether the particular national
industry had less of a stake, or some combination of the two, is unknown to the
author. The simple observation is that even when a package deal does hold
together through development, there is this very discernable vul nerabi li ty , in
this regard.

Nevertheless, in spite some instability in the otherwise larger order base
provided by the two nations' armed forces and the larger management effort
involved in dealing with the various components of the two governments, the
helicopter package has been a success. Instead of having to totally offset
national interests within each project, these interests could be externally
offset as well within the overall package, and thus allowing for a more rational
distribution within each single project. That is to say, the greater flexibility
did definitely allow for an efficient, yet mutually acceptable relationship
between the two nations' contractors. In addition to its simple logic, the
export results of all three systems can be viewed as substantial indicators of
the cost-effectiveness of each project. When the labor government was forced

^8"New Orders . . . ," op .

cit .

Chapter 13
44

into a second drastic cut back in its defense programs in January 1968, the
Anglo-French programs were barely disrupted, while the Anglo-American offset
program came to an end with the cancellation of orders for the F -11 IK . Even
though the British Army was to take the heaviest manpower cutbacks, the extensive
helicopter program was not abandoned, apparently because of the firm commitments
with France in joint production. With regards to the general success of the
Anglo-French three helicopter program, however, one must keep in mind those
problems faced, as well the partial abort of the previous Anglo-French tactical
aircraft package, in considering the feasibility of the DoD's "family of weapons
concept."

Chapter 13
45

C. THE FAMILY OF WEAPONS CONCEPT

NATO nations have already had experience with the Family of Weapons concept as

we've seen with the two Anglo-French package deals - the AFVG fighter/Jaguar and

Puna/Gazelle/Lynx packages.

One could possibly also include the three Franco-German missile projects (Hot,

Milan, Roland) that have taken place within the framework of a bi national missile
project effort. But due to the general nature of each system as a 50-50 effort
excluding major tradeoff within the package, they were treated under Mode #3.

Having yielded design leadership to Breguet for the Jaguar in the otherwise 50-50
joint development and production Jaguar project, 70 BAC was eager to have leadership
of the BAC-Dassaul t team in the TSR-2 replacement, the AFVG fighter, but this second
project collapsed two years later in 1967. This in turn led to BAC teaming with the ^
German jfirm MBB in 1968 for the MRCA. The helicopter package was more successful
(as well as the systems being less controversial). Though there were some
adjustments in orders, both nations participated to varying degrees in the
development and production of all three.

Since 1977 and the assumption of office by the Carter Administration, a recent
U.S. variation has been gaining momentum as the "Family of Weapons" concept.

This concept was evidently directly inspired by earlier inter-service arrange-
ments worked out among the U.S. Armed Forces back in the 1960's, not the Anglo-

The first two were principally French and the last principally British.

^The Jaguar also took place predomi nantly within a French contracting frame-
work .

Chapter 13
46

French experience. It also offered the possibility of bridging the gap between
the U.S. interdependent approach to R&D and the European joint development
approach. And much as this paper distinguishes between three areas of NATO
institutional activity and 8 Modes of ad hoc nati on-to-nati on collaboration
within the total Alliance collaborative effort, the DOD views the family of
weapons approach as one of three legs of its triad of cooperative actions being
initiated within the Alliance. The other two legs of the triad are: bilateral
Memoranda of Understanding (MOU's) for the waiving of buy-national restric-
tions;^ and dual production in several countries of a system developed
unilaterally in one (i.e. Modes #1, #2, #4, #7, and possibly #8).

In early 1979 a U.S. Defense Study Board study group, including representati ves
of industry and the DOD, completed its study and drafted a report on the develop-
ment of families of weapons for the North Atlantic Alliance. The group's report
concentrates on two areas: air-to-air and anti-tank missiles. It is accompanied

by two model MOU's, one for each of the above families, plus it gives an industry

point of view on how to consummate the development of weapons families.

One MOU envisions the U.S. as the sponsoring government for an advanced medium-
range air-to-air missile (AMRAAM) , while either the UK, France or the FRG could
be the sponsoring government on the European end, acting on behalf of a multi -

national consortium, for the advanced short-range air-to-air missile (ASRAAM).

7Hhe U.S. has already negotiated such umbrella MOU's with Canada, the FRG, the
Netherlands, Norway and the UK.

David R. Griffi ths, "Weapons Family Concept Backed," Aviation Week & Space
Technology, April 9, 1979, p. 14.

Chapter 13
47

The second MOU envisions a division of work with the U. S. having responsi bi 1 i ty

for the next generation of i ndi rect-fi re guided anti-tank weapons, and the

European consortium, (again with either of the three principal countries as a

sponsor) responsible for the next generation of di rect-fi re guided anti-tank
74

weapons .

Two designs for AMRAAM from Hughes and Raytheon are presently being evaluated by
the USAF to meet future air-to-air missile requirements. This 33-month valida-
tion phase of the AMRAAM project will lead to a development and production

contract for one of the two companies.

The study group, while calling AMRAAM a good candidate for collaboration,
expressed doubts about ASRAAM as a complimentary European effort since it is not
yet fully defined and doesn't reflect requirements of all potential users.76

The study group, also expressed some reservations as to the logic of the fit of
the two designated anti-tank systems, as complementary systems in a single
family. As a possible alternative the report mentioned an intensive product
improvement effort on current generation anti-tank missi 1 es, such as Euro-
missile's Hot, while the U.S. concentrates on improvements to the TOW.77

Ibid.
Ibi d.
Ibid.
Ibi d.

Chapter 13
48

Ingenierie preeminente.
Technologic sans egale.
Pour la superiority
aerienne jusqu’au
XXT siecle.

Un programme de
cooperation internationale.

i HUGHES !

8 I

HUGHES A TrCR A FT C O MR ANY

For work sharing, the model MOU's propose that a minimum threshold of at least

20% of the total subsystem design, development, and testing be conducted by

subcontractors on the opposite side of the Atlantic from the prime, as agreed to

by the parties involved.

Other facets of the model memoranda include:

The sponsoring government shall provide 100% of the development
program costs by funding its prime contractor according to its own
custom. The group said such an approach would be the least complex in
terms of defense budgets and financial management;

Technology transfer directly by i ndustry-to-industry negotiations
rather than government-to-government transfer of whole data packages
_ is preferable, partly because such a vehicle will be quicker;

Family of weapons will be delayed and complicated if the U.S. does not
undertake immediately a study to define changes and waivers needed in
laws and Defense Department regulations concerning, for example,
antitrust limitations, and;.

Comprehensive source selection criteria must be agreed to at the

outset of the program.

Ibid.

Chapter 13

The study group found itself divided evenly on inclusion of European participants

in the AMRAAM program. One side said Europeans might view the U.S. as insincere

if European subcontractors are not included before 1982, when the engineering

development phase is scheduled to begin.

The other point of view held -that breaking AMRAAM momentum to allow integration
of European subcontractors during the validation phase could "imperil the entire
program due to lost time, increased costs, added bureaucratic delays and critical
congressional scrutiny. "81

The study group also singled out the third country sales issue as a major problem
area, the current U.S. policy being one of case-by-case determination. The model
MOU's stipulated that participants in a family of weapons agreement must meet

annually to discuss expanding the sales territory where non-NATO countries are

concerned.

Another area where further study was suggested, was the effects that the family
of weapons concept would have on the U.S. technological base, i.e., the possible
atrophy of U.S. technological capabilities in those areas assigned to European
NATO allies.83

Ibid.
Ibi d. ,
Ibid.,
Ibi d.

pp.

14-15.

15.

Chapter 13
50

In summing up, the report offered the model MOD'S as "policy documents," that may

have to be followed up by more specific government-to-government agreements.

But, the report qualified this by emphasizing that most of the implementing

agreements should be between industries and negotiated by the contractors

involved in each program.

William J. Perry, Under Secretary of Defense for Research and Engineering further
stated that:

"On all programs for which we are responsible for development and
production, we will select the U.S. prime contractors, subcontractors
and European subcontractors on a competitive basis to insure the
best technology and lowest cost in the resulting system. "85

The chairman of the group, R. D. DeLauer, Executive Vice President of TRW, Inc.,
told Aviation Week & Space Technology, "The report raises as many questions as
it answers, such as multiyear funding, source selection, third-country sales and
whether technology exchange should be country-to-country. But it will give Bill
(Perry) a phase zero to start with. It is something industry can work with, and
it's a basis for dialogue with the RSI (rationalization, standardization and
interoperabil ity) subcommittee. "86

Sadly enough, shortly thereafter the House Armed Services NATO subcommittee came
out with a report that was critical in its main area of focus: the effort to

Ibid.

Chapter 13
51

coproduce weapons and make them interoperable. It labeled the two-way street
expression, as "an exercise in sloganeering... that has no relevance to sound
procurement practices." The committee found no evidence that coproduction will
either save money or improve military effectiveness. Also criticized was the
Pentagon's "family of weapons" concept. Such a concept, the House committee
said, would eliminate competition "and it still remains to be demonstrated that
NATO can eliminate competition without lowering technological standards." The
committee further found that the U.S. has not honored its commitment to a 3%
annual real growth in the Defense budget since President Jimmy Carter agreed to
it. Even if the U.S. had honored its commitment, the 3% figure is not sufficient
to reverse unfavorable trends in the NATO-Warsaw Pact conventional forces
balance, the report said.

Involving a package of two or three related projects, the Family of Weapons
concept_offers both a more feasible approach than one involving an alliance-wide
multi-project division of labor, and a more efficient approach than attempting to
obtain all the required intra-group trade-offs within one project. Falling
between these two extremes, within a Family of Weapons one can obtain standard-
ization related economics and a more rational distribution of development
responsibilities, while also maintaining a politically acceptable set of trade-
offs for development and production.

Additionally this concept allows the allies to bridge the gap between the
mutually unacceptable U.S. and European developmental concepts. The preferred
U.S. approach of interdependent development places a premium on a rational

Chapter 13
52

distribution of work whereby one nation assumes complete developmental responsi-
bilities at both the government and industry levels, followed by second and/or
third source production under license in the other participating nations. Due to
the dependency involved here, vis-a-vis both fulfilling a given military
requirement and its long-term impact on the national technology base, this
approach has been politically unacceptable to the 3 European medium powers. The
preferred approach for these three has been one of joint development wherein a
premium is placed on the nations participating as coequals, a politically more
acceptable solution, but one for which the U.S. has found the cost/manageability
drawbacks as unacceptable.

Therefore, to take the example of a two project Family of Weapons, on the North
American side the U.S. could take the lead in managing one project within the
'Family', with minor work sharing (e.g. 20-30%) being allocated for one or more
other participating nations. On the European side, the two or three participat-
ing medium powers could assume the lead, with the other European firms, plus
North American firms receiving a smaller share of the work. Following develop-
ment, through license production each system would be produced on both sides of
the Atlantic, thus allowing for technology sharing, minimum BOP /employment dis-
ruption, standardization and an alternate source while avoiding duplication in
the RSD efforts.

In summary, the 'Family of Weapons' concept represents another valid Mode for
increasing collaboration, especially on the transatlantic level. Unlike many
other schemes it has also proven itself at least to be feasible through its
Anglo-French precursors. This Mode offers a mechanism between the extremes of

Chapter 13
53

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the alliance-wide approach of the early 50 1 s and 60 's and the more prevalent
project by project approach. It also combines many of the benefits of the
previous seven Modes while avoiding many of their costs. In addition, the
'Family of Weapons’ concept can help to bridge the gap between the U.S. and
Europe's three medium powers over cooperative development philosophies (i.e.,
interdependent versus joint).

Chapter 13
54

SMITHSONIAN INSTITUTION LIBRARIES

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